Inflation v/s growth: RBI may not cut rates immediately

With the central banks in Britain and China cutting rates by 25 basis points each, all eyes are now on the Reserve Bank of India. Everyone is waiting to see what the banking regulator will do when it meets next on July 31. With growth rates slipping to 5.8% in the first quarter, and status quo maintained in the June policy, there are expectations that the central bank may cut rates soon to revive growth.

Central banks in Britain and China slashing rates would also put additional pressure on the RBI to act fast. In the case of China, it is for the second time in less than a month that the Central Bank has cut rates as growth rate in China slowed down to 8.1%, for the first quarter of the year, the slowest in the last three years.

However in India, the central bank is battling inflation versus growth. Inflation measured by the wholesale price index (WPI) for the month of May stood at 7.55%. With monsoon being below average for the month of June, inflation could rise further in the coming month. "Though the economic environment is conducive to a rate cut, high inflation and poor monsoon progress is a concern.

Hence the central bank may maintain a status quo in the coming monetary policy," says Mahendra Kumar Jajoo, Chief Investment Officer- Fixed Income, Pramerica Mutual Fund. However interest rates are headed down over the next one year. "Based on how the monsoon progresses as well as inflation, rates could go down by as much as 50 basis points by the end of March 2013," says Arvind Chari, Senior Fund Manager (Fixed Income), Quantum Mutual Fund.