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RBI cuts rate maintaining ‘neutral policy’ stance

The rate cut will spur capital investment, drive GDP growth and therefore increased consumer discretionary spends which bode well for our industry

As per the speculations, Reserve Bank of India (RBI) trimmed the repo (re-purchasing option) rate by 25 basis points to 6 per cent from 6.25 per cent. This rate is the lowest since November 2010 yet the market is abuzz with the terms like ‘small cut’ or neutral monetary policy stance.

“The actual outcome for the first quarter has tracked projections. Looking ahead, as the base effects fade, the evolving momentum of inflation would be determined by (a) the impact on the CPI of the implementation of house rent allowances (HRA) under the 7th Central Pay Commission (CPC); (b) the impact of the price revisions withheld ahead of the GST; and (c) the disentangling of the structural and transitory factors shaping food inflation”, RBI governor Urjit Patel said.

However, the rate cut did not go as far as what India Inc wanted. The Chief Economic Advisor Arvind Subramanian had on 8th June said: “Inflation forecast errors have been large and systematically, one-sided in overstating the inflation. In this (alternative) view, the inflation outlook has been rendered benign by an appreciating exchange rate, a good monsoon and a capping of oil prices by structural shifts.

The current level of inflation is at comfortable levels and leaves room for further rate cuts but the RBI isn’t sure about the inflation trajectory in the next fiscal quarter and speculates that inflation would raise its head again to around 3.5 to 4.5 per cent in the second half of the year.

On the macro level, we expect that this will spur capital investment, drive GDP growth and therefore increased consumer discretionary spends which bode well for our industry. 

Also, given that consumer durables are high-value purchases, we expect that lower financing costs as a result of the rate cut will drive higher growth momentum in a low penetrated market. Whirlpool has been bullish on the growth prospects for our business in India and this cut in the repo rate by the RBI further strengthens our strong industry outlook for the future.

Central Bank has used the policy space opened up by continued decline in inflationary pressures, reduction in global oil prices, and appreciating currency. According to the Morgan Stanley report released yesterday, “The overall tone of the statement was balanced and in keeping with the neutral stance, in our view. The MPC noted that the slippage in inflation excluding food and fuel reduced upside risks to inflation and smooth implementation of GST as reasons for justifying a rate cut in this meeting. However, given that inflation is projected to rise, the MPC has kept its stance neutral and will continue to watch incoming data.”

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RBI cuts rate maintaining ‘neutral policy’ stance

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