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What will RBI do on Monday?


Did RBI clearly telegraph government they will not cut rates unless something was done on the policy area? Did RBI agree to cut if there was some strong policy movement? Were these the reasons for comatose government to suddenly wake up?

Can RBI really cut rates?

It was widely expected to cut rates. But with the latest shock and awe "reform" blitzkrieg it looks like Manmohan Singh has answered for RBI. If the "growth" is really back on track, RBI has to do nothing. And with the Diesel price hikes and LPG subsidy cuts, its clear we are looking at an inflation spike couple of months down the road. RBI will surely be uncomfortable with that.

RBI's rate cut, though badly needed, will only bailout an incompetent government. But this is the season of Central Bankers bailing out the Governments inefficiencies. Obama, Merkel, Rajoy and host of others got bailed out this week. Will RBI bailout Manmohan?

Having missed out on the monsoon session to do anything reasonable, it is hard to foresee what government can really do - on ground - to move the economy forward. We are practically staring at a 3 month drought on policy implementation.

Also few other factors may stay RBI's hand. The lack luster monsoon is still to play out in terms of harvest. In 2009 though the monsoon revived late, it ruined the standing crops creating a spike in food inflation. RBI may want to wait and watch until November.

Also, with quantitative easing across the globe is likely to keep the commodity prices high for foreseeable time. This will be a strongest international factor their scheme of things.

High Commodity prices would mean higher fiscal deficits while also implying larger quantum of gold imports. Basically we are setting up for a large imported-inflation which could ruin the current balances. This would be particularly bad if Rupee depreciates [which might happen if EU crisis deteriorates.]

Also, almost all the countries have stayed cutting the rates though they were given high probabilities of the rate cut.

Also, why cut rates if the things are all good as portrayed by the markets near YTD highs? This too for the month of September which is practically the worst month statistically!

Conclusion:

RBI faces lots of risks on inflation front which may stay its hand. But RBI cannot be forgiven for having kept the rates too high for inordinate amount of period aggravating the incompetent lethargic government’s effect on economy..

The growth is a matter of fiscal and governmental policies and monetary policy can only help them to an extent. Rates have to be brought down and it might have looked good politically to go for a cut here.

Diesel price hike and LPG cut is a real wild card here. My guess, the substantial decision will depend on how RBI reacts to this move.


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