Considering the market conditions, some rate cuts seem imminent in the near future. However, the government and RBI are playing safe. They are analysing the situation carefully rather than acting in a hurrySome factors influence the RBI's decision on monetary policy. An analysis of these factors indicates borrowers can expect some softening in interest rates in the medium term.
Global issues:The global economy is going through a recession phase. There is a softening of prices in the global commodities market. Prices of all major commodities have come down significantly. Crude oil prices have come down to one-third of their peak prices quoted in March this year.
Due to the global recession, foreign funds are withdrawing their investments from domestic markets to shore up resources to beat the global liquidity crunch. Foreign institutional investors (FIIs) have remained net sellers in the domestic stock markets this year and have sold stocks worth more than USD 12 billion so far.
The effects of global slowdown have started showing up in the domestic economy as well.
RBI: The RBI has already announced one round of sharp cuts in key policy parameters in October this year. Analysts believe the RBI will announce more rate cuts shortly to shield the domestic economy from the global economic slowdown.
Inflation cools down:Inflation is showing a downward trend in the last couple of months. It has come down from around 12.5 percent to 8.8 percent last week.
This is mainly due to lower prices of essential commodities like vegetables, pulses and cereals, and some manufactured items.
Analysts expect a further dip in the inflation level due to further softening in commodity prices, as the global economy is going through slowdown and demand is quite weak.
RBI:Analysts are predicting inflation will come down to around 4 % by March 2009.
Given that inflation was one of the main reasons to tighten the monetary policy earlier this year, government and RBI will be more flexible to cut interest rates as inflation slows down.
Slowdown in domestic market:The demand in the domestic market is visibly slowing down over the last couple of months. It is also visible in various data reported by the industry and analysts' reports.
Many global research firms have revised India's GDP growth rate downwards for this fiscal as well as the next fiscal. The main reason for this slowdown in the domestic market is the negative investor sentiments following the slowdown in the global markets.
RBI:The Government and RBI are taking many careful measures to stimulate demand in the local market.
Bringing down the cost of funds is one of the ways to stimulate demand.
Abrupt rate cuts result in excess liquidity in the system. Therefore, a combination of reduction in repo rate, reverse repo rate and CRR is the way.
-The Economic Times
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