Is Rate Cut on Cards for RBI’s 4th October Meet?

Urjit Patel’s first interaction with the economist, since the taking over from the rockstar governor Raghuram Rajan, has sent out a doveish outlook and has also given his first view where he stated that the impact of GST on the inflation will be minimal. He has also stated that the growth objective is a mandate of the new MPC.

Behind the closed doors of the meet between the newly appointed RBI governor and the economists, the agenda of discussion was real simple. Even if interest rates are not lowered in the 4th October meet – as the outcome would now depend on the decision of the newly constituted Monetary Policy Committee, MPC, (of which Patel is a member) – the RBI is likely to maintain a dovish and accommodative stance on interest rates and liquidity.

Sources familiar with the discussion said that the governor is of opinion that the impact of GST (goods & services tax) on inflation would not be as drastic as has been widely perceived earlier. Patel also added the weight assigned to public sector housing and the rent in the calculation of the CPI should be lowered. He also informally address his view that a lot of items from the CPI basket would not be affected by GST and additionally one might even observe a lot of reduction in price on a variety of items which might be helpful in bringing down inflation.

This is the first time India has been gifted a Monetary Policy Committee, where all the members have a voting right. The good monsoon has given a hope for a rate cut. Therefore, the ones tracking the policy of RBI will wait with crossed fingers when the committee meets on 4th of next month to decide on the next course of action.

We have seen mixed reactions from the industry where half of them fears that demands for items such as automobiles might see a drop as households will be expecting a price cut once GST is rolled out. Simultaneously, some analysts opined inflation could soften with the cultivation of pulses rising significantly.

In the last few trading sessions, banking stocks have been big under-performers and currently Bank Nifty is trading below the critical support level of 19,730 with the next target level of 19,300, wherein Nifty share price is at 8,746.40. The major reason for this under-performance is Axis bank. Axis Bank share price (NSE 548.95 apiece) has fallen on the buzz of stake sale by the Specified Undertaking of the Unit Trust of India.

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