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In govt, bet is on a 50 bps rate reduction

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'Accommodative Stance Must To Revive Sentiment'
Market players and economists may be betting on 25-basis-point (100bps 1 percentage point) rate cut by the RBI next week, but an influential section within the government believes that nothing less than a 50-bps reduc tion with an “accommodative“ stance will revive investment.
Differences between the RBI and the government over the extent of an interest rate cut have come out in the open in the past few months with the chief economic adviser in the finance ministry Arvind Subramanian expressing disappointment with the central bank's move not to cut rate as well as the monetary policy committee's (MPC) reading of the inflation situation.
Several private sector economists have also criticised MPC's inflation estimates. While efforts have been made to play down the differences, a wide gap in views between the central bank and the finance ministry over the direction of interest rates remains.
Multiple sources in the government told TOI that a small reduction in interest rate will not lead to step-up in growth and investment. They pointed to record low inflation to back their calls for a sharp reduction of at least 50bps when the central bank reviews monetary policy on August 1 and 2. They pointed out that the “pendulum“ has swung “overwhelmingly“ in favour of a sharp cut in rate, given the significant decline in inflationary pressure both on retail and wholesale prices.
The real cost of raising funds has gone up as inflation has slid to record lows.But economists said inflation rates are unlikely to stay at these levels. Sources said this is the best chance to “aggressively“ cut rates when the inflation rate is well below the central bank's comfort level and all available forecasts say they are expected to remain benign for now. Sources added that the central bank may have to clearly articulate its views on switching to an “accommodative“ stance in its statement. An accommodative stance means the prospect of a rate cut is high.
Times of India, New Delhi, 29th July 2017

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