Five reasons why RBI must cut interest rates today

NDTV Profit Desk

17 Sep 2012, 08:23 AM IST

The RBI has held borrowing costs steady since a deeper-than-expected 50 basis point cut in April, and has repeatedly called on the government to do its part by improving its fiscal position. Finally, the government set the ball rolling. On Friday, it announced its decision to open up the retail and airlines sector to foreign investment. It has also announced share sales in four state companies as it looks to jump-start flagging growth. These moves show that the government is serious about fiscal consolidation and encouraging investment.
The government raised the price of subsidised diesel on Thursday, which would ease concerns over rising subsidy bill because state-run oil refiners have been selling fuel at below market prices. The measure is aimed to rein in a ballooning fiscal deficit and avoid a credit rating downgrade to junk.
Analysts have cut their economic growth forecast for the current fiscal year - some to as low as 5.1 per cent - amid stalling industrial and manufacturing activity and concerns about the current account and fiscal deficits and lack of reforms. Last week, HSBC cut its growth forecast citing the RBI will push back the timing for rate cuts as one of the reasons for slowdown in growth.
Central banks elsewhere are trying to ease monetary conditions to counter a global slowdown. Last week, the US Federal Reserve launched a third round of quantitative easing to retain the growth momentum in the world’s largest economy.
The U.S. Federal Reserve's aggressive stimulus plan last week complicates the RBI's task, as the injection of liquidity delivered by the Fed's measures may push up global commodity prices and add to inflationary pressures in India. Inflation is likely to rise because the lag effect from rising global crude oil prices are still to be felt in India.

(With inputs from Thomson Reuters)