@Leisure - Vol-43 | srei
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@Leisure - Vol-43

Why 2018 may turn out to be the year without rate cuts?

Title: The government in India has been clamouring for an interest rate cut but it seems that their prayers may go unanswered in the year 2018. The Reserve Bank of India (RBI), India’s central bank’s mandate of keeping inflationary pressures in check may come in the way of a much anticipated rate cut as it strives to maintain a balance between growth and inflation. Here are some factors that make any significant rate cuts in 2018 a difficult proposition:

Inflationary Pressures: Inflation has been exerting pressure on the Reserve Bank as it stays firm. The predicted inflation forecast for the first half of 2018 is 4.3 per cent to 4.7 per cent. This forecast is not very different from the previous estimate which was 4.2 to 4.6 per cent. However, without a drop in inflation it would become difficult for the Reserve Bank to cut rates. Furthermore, these inflation numbers have not accounted for HRA increases made by various state governments in the salaries of their employees. It is expected that this will further push up housing inflation in the country. An increase in the prices of crude oil will also add to inflationary pressures in India in 2018.

Growth Momentum: If there was an unexpected fall in growth or if the central bank were expecting such an eventuality, it would be a trigger for a rate cut, but there is no such projection. The slowdown in growth which was triggered by demonetisation in 2016 and the implementation of Goods and Services Tax (GST) has been petering out. There are in fact signs of improvement in the economy with GDP growth rate predicted at 7.2 per cent in 2018 due to strong public investment, growing private consumption and structural reforms carried out by the government according to the World Economic Situation and Prospects 2018 report of the United Nations Department of Economic and Social Affairs.

Liquidity Position: The banking system is still flush with cash after the demonetisation carried out in November 2016. At the same time India has been experiencing strong portfolio inflows as well. The central bank is likely to take the aide of market based tools like reverse repo auctions and market stabilisation bills instead of lowering interest rates to return the liquidity to a position of ‘neutral balance’ which it favours.

Conclusion: It would be highly unusual if 2018 turns out to be the year where there are any substantial rate cuts considering the Reserve Bank having to walk a tight rope between management of liquidity, taming inflation and keeping the growth momentum going.

Buddy Jokes

How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case. - Robert G. Allen

What is the leading cause of debt among people? People trying to play catch up with other people already in debt.

The other day my wife’s purse got snatched, all her credit cards were in it as well. I would have reported the theft to the police but the thief is spending far less than she does!

"Money is like a sixth sense – and you can't make use of the other five without it." – William Somerset Maugham