In the forthcoming quarterly monetary policy review, RBI should reduce repo rate by 25bps as a) the demand-led (or core) inflation (where RBI’s policy is most effective) has already eased substantially, b) the economic slowdown is deepening as shown by GDP data, IIP numbers, rising NPA cycle etc, and c) the global economic downturn is spreading, suggesting lower commodity prices and downside risks to India’s growth. This warrants a monetary easing in our view. Indeed, we argue that high interest rates are now becoming counter-productive. However, given that RBI has shifted its focus from core to headline inflation of late (where upside risk exists due to poor monsoon), there is a likelihood that the central bank may resist further easing this time.
Regards,
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