4 reasons why Raghuram Rajan should cut rates tomorrow

The Reserve Bank of India (RBI) is likely to cut its key policy rate - the short term lending (repo) rate-by 25 basis points to 7 per cent in its  fourth bi-monthly review of monetary policy on Tuesday  this week.
 
RBI governor had last reduced the repo rate by 25 basis points to 7.25 per cent in his review in June, which took the total reduction to 75 basis points since January this year.
 
According to experts, there are positive developments on all the four points raised by RBI Governor Raghuram Rajan two months ago. The policy statement then stated ,"significant uncertainty will be resolved in  the coming months, including the likely persistence of recent inflationary pressures , the full monsoon outturn , as well as possible Federal Reserve actions". As Reserve Bank awaits greater transmission of its front -loaded past actions , it will monitor developments for emerging room for more accommodation."
 
Let's review each of the four critical parameters :

• Inflationary pressure: There has been a moderation in inflationary pressure. The consumer price index (CPI)or the retail inflation , has been on a decline. In August last month , it touched a 10th month low of 3.66 per cent, which is well below the targeted level of  6 per cent by January 2016.  
• Monsoon: There is not all bad on the monsoon front. According to Indian Meteorological Department (IMD) ,the monsoon deficiency has been reducing though full impact would be visible only after October month this year.  
• US Fed Rate:  The US Fed rate action was much awaited as any hike in the interest rate would be resulted in some  short term panic in terms of outflow of dollars from emerging markets like India. The dollar outflows generally weaken the currency ,thereby raising the threat of imported inflation. But Fed once again has deferred the decision to end of this year. This has brightened the chances of a rate cut now.
• Interest rate transmission: Governor Rajan has been concerned about delay in monetary transmission as 75 basis points reduction has only resulted in a 25-30  basis points reduction in banks'  base rate, which is the minimum lending rate. This shouldn't come in the way before cutting interest rates as RBI is now devising other ways for faster transmission to retail as well as corporate borrowers.