While there are 10 more days to go before Urjit Patel is passed on the baton at Reserve Bank of India by Raghuram Rajan, the government is building a case in favour of a rate cut arguing the cost of credit in the country is very high.At an event a few days ago, Transport and Infrastructure Minister Nitin Gadkari said cost of funding was very high in India and that he hoped for a 2 percent rate from the Reserve Bank, a call that was re-iterated today by Commerce Minister Nirmala Sitharaman.
Leading economists, however, believe this is just wishful thinking as the Ministry of Finance and RBI have already agreed on an inflation target and unless inflation comes off, there is no room for a rate cut.
In an interview to CNBC-TV18 Madan Sabnavis, Chief Economist of CARE Ratings said certain industries are hopeful of a rate cut as investment is facilitated with lower rates. "However, keeping current inflation rate in sight it seems unlikely RBI will deviate from its target," he said.
Soumya Kanti Ghosh, Chief Economic Advisor, State Bank of India says, "I don’t see any reason why rate should come down when inflation is at 6 percent."
Below is the verbatim transcript of Soumya Kanti Ghosh and Madan Sabnavis's interview to Prashant Nair and Ronojoy Banerjee on CNBC-TV18.Prashant: How should we first of all take the comments which are coming in, two Union Cabinet Ministers saying well big rate cuts are needed, should we see this as a signal to the RBI or you think that’s going too far?Sabnavis: No, I think it will be a bit going too far to think the signal to the Reserve Bank of India (RBI). I think when the ministers have spoken about the RBI cutting rates, [they have aired] some of their wishes. Because they are into certain sectors that do require higher investment, which would be facilitated in case interest rates come down. We should remember that the Ministry of Finance and the RBI find that agree, where you are talking of targeting inflation.I don’t think there is any discussion about whether interest rates can be low as long as inflation is high. I think this is an advice being, this is their desire but I don’t think the monetary policy committee is going to deviate from the agreement which has been signed by the government themselves.Prashant: How would you look at this? The government and the Reserve Bank of India (RBI) have a pact, inflation has to be brought down to a certain level and it has to be kept in that range - 2-6 percent essentially. So, when senior ministers make these comments, just mere wishlist for their respective sectors or something bigger?Ghosh: I tend to agree with the fact that it could be a part of the wishlist because now that the RBI and the government have formalised inflation targeting and that has been enshrined in a legal framework, I don't see any reason why rate should come down if the inflation currently is at 6 percent. So, there could be a wish that you should bring it down by so many basis points. However at the end of the day if the government and RBI are targeting inflation, that means both of them must be in full sync that there has to be some measures whereby the inflation should come down. Until and unless it comes down there cannot be any scope for monetary accommodation.The other point which I would like to mention in this case is basically, the market should now look to other alternate modes of transmission rather than only looking at a repo rate cut.Ronojoy: Staying with that issue on inflation, if you could come in on this, because Raghuram Rajan has of course on many occasions in the past talked about the future inflation trajectory being uncertain primarily because of rising oil prices, the impact of the Seventh Pay Commission recommendation and also as recently yesterday the IMD has basically come and sort of downgraded its forecast for rainfall. Considering all this, what do you see any realistic room for a rate cut in the immediate future by Urjit Patel?Sabnavis: I don’t think there will be a rate cut in the immediate future, because traditionally we have seen in the last 10 years we have seen consumer price index (CPI) inflation being less than 5 percent only once. I think even under normal monsoon condition with a normal kharif harvest, the inflation number will continue to hover around 5 percent, so this time I think the number of 4 percent which was fixed was a slightly puzzling to me even today, but this said I would say that in case the inflation number move from 6 percent towards 5 percent, that would open the window of support for RBI Governor to cut rate and we get a clearer picture by November-December.Ronojoy: I am curious to know how you economists look at Urjit Patel because the main task for the RBI now is inflation targeting and Urjit Patel was instrumental in preparing the report on the basis of which RBI came up with this policy of monitoring inflation and therefore they have given a 2-6 percent guidance. Do economist see him having more of a hawkish stance?Ghosh: I think the good thing is that the incumbent governor has actually formalised inflation targeting and it is actually very good that he is taking up the mantle of governorship at this point of time because that will add policy continuity. So, beyond that I don't want to read too much into whether he should be cutting rates or not cutting rates, whether he should be hawkish or dovish because at the end of the day you have a number to conform with and for that number to get conformed with you need to do whatever has to be done.
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