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Should RBI mimic China's policy?
Thu, 28 May Pre-Open

If you recall, in its first bi-monthly monetary policy statement announced on April 7, 2015, the Reserve Bank of India (RBI) decided to keep the policy repo rate unchanged at 7.5%. The central bank's second bi-monthly monetary policy statement will be announced on June 2, 2015.

What will the RBI do this time around? As you are already witnessing, the euphoria that surrounded Modi's coming to power is waning. According to a Deutsche-Borse survey, corporate sentiments towards Indian business climate and future expectations have dipped to levels witnessed before Modi became the Prime Minister. The falling business confidence is also reflecting in the stock prices, which have been on a downtrend for some time.

So the next key trigger that the market participants are eyeing is RBI's upcoming policy review. Will the central bank cut interest rates this time around? Or will it keep the rates unchanged?

Let's see what Arvind Subramanian, India's Chief Economic Advisor (CEA) thinks about the issue. As per news reports, he is aggressively batting for an interest rate cut. What are the key reasons why he thinks interest rates should be cut?

Inflation...

The consumer price index is expected to be below RBI's target. CPI inflation has come down to about 5% levels as per the latest reading. In fact, the wholesale price index (WPI) has declined by 2.7%. With retail inflation expected to remain around 5-5.5%, Arvind Subramanian believes that there is room for rate cut. Moreover, he also says that India has enough foodgrain stock to battle a poor monsoon.

Fiscal consolidation...   

In his view, the government's fiscal consolidation is pretty much on track in both quantity and quality terms. This is another reason he feels makes the case for further monetary easing to boost consumption.

China's aggressive monetary easing

Subramanian points out that the dragon nation responded to the slowdown in its economy by aggressively easing its monetary policy to keep its currency competitive. He believes that India too should respond in a similar manner. Otherwise the rupee will become uncompetitive and the government's Make in India export-oriented manufacturing thrust would not succeed.

Will RBI Governor Raghuram Rajan give in to the stand taken by India's Chief Economic Advisor? We will know very soon.

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