InvestorQ : How do you think that this inflation will have an impact on rate cuts by the RBI in future?
Arya Nanda made post

How do you think that this inflation will have an impact on rate cuts by the RBI in future?

Answer
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Anjana Aiyar answered.
1 month ago


Could have a sharp fall in food inflation due to the bumper Kharif Crop this year? That is a question that is yet to be answered but it looks like food inflation will continue to remain elevated even if we assume good monsoons and record Kharif output for 2020.

The sowing is higher by 14% and rainfall is normal and well distributed. However, all that will translate into fall in prices only if there is support from the supply chain. Unless transport services recover and labour returns to work, this issue will continue.

So, what exactly is the RBI likely to do when it meets in October 2020 for the monetary policy to decide on the rates? Remember, the RBI opted to maintain status quo on rates in August despite growth being unable to pick up significantly.

It certainly looks like an October 2020 rate cut may be ruled out. As of now, consumer spending is picking up and the high level of fiscal deficit will put pressure on inflation. Fiscal deficit will also mean that the gap will have to be deficit financed, putting more stress.

What about December? Repo rates are the lowest India has seen in 20 years so scope for further rate cuts is limited. Hence RBI may look to reserve the leeway on rates because it has got only limited space. December will be more critical for RBI.