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RM Reports

Rate Cut or Status Quo, Raghuram’s Dilemma

Santosh Sinha/RealtyMyths

Raghuram Rajan, governor of the Reserve Bank of India (RBI), speaks during a news conference at the central bank's headquarters in Mumbai, India, on Wednesday, Sept. 4, 2013. Rajan, a former chief economist at the International Monetary Fund who has been the top adviser in India's Finance Ministry since 2012, took over as the new RBI governor today from Duvvuri Subbarao for a three-year term. Photographer: Dhiraj Singh/Bloomberg *** Local Caption *** Raghuram Rajan

Raghuram Rajan, Governor of RBI

The real estate sector, in particular, is looking at the governor with eyes wide open. The sector is already reeling under tremendous pressure. The sluggish demand coupled with costlier loans has broken developers’ confidence. Investors too, are shying away. Though the recent budget announcements have raised some hope, it all comes back to RBI and its governor Raghuram Rajan.

Reserve Bank of India, country’s central banking institution is scheduled to do its monetary policy review on April 05, 2016. It will be first such review after the announcement of Union Budget for this financial year. It, therefore, becomes the most important event for the economy. The industry expects RBI Governor Raghuram Rajan to cut the Repo Rate by 25 basis points. The last cut in Repo Rate was done on September 29, 2015, where the key rate was slashed by 50 bps to 6.75.

There are many factors which RBI takes into consideration while reviewing the key lending and borrowing rates i.e. Repo and Reverse Repo rates. Some of them are inflation and CPI, fiscal deficit and monsoon. The Consumer Price Index (CPI), the prime basis to calculate inflation stood at 5.2% in February 2016. It is on the expected line and fairly under control. However, the core CPI rose to 4.9% in February 2016 from 4.7% a month ago. Similarly, the government has set the fiscal deficit targets at 3.5% for FY17 and is working on the desired lines. It is expected that government would meet its fiscal deficit targets comfortably. However, RBI appears little skeptic about the monsoon. A ‘below-expectations’ monsoon would impact overall agricultural production, especially the Kharif crops. This would affect the Wholesale Price Index as well as the CPI. The economy has already witnessed a bad monsoon last year. A repetition could be a disaster for the economy. Mr. Rajan thus, may maintain the status quo this time as well.

Going by the market developments, the way inflation has behaved in last six months and the way respective price indexes have corrected themselves, it appears that Raghuram would cross its ‘Laxman Rekha’ and would cut Repo Rate by 25 bps at least. However, a fear of bad monsoon may spoil the show. It would thus be interesting to see which way the camel sits tomorrow.

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