Five reasons why the RBI should cut interest rates

  1. Growth: India's economy grew at 4.5 per cent in the December quarter and is on track for its slowest performance in a decade at around 5 per cent for the fiscal year that ends in March. There is intense pressure from industry and government to loosen monetary conditions to help arrest the economic slowdown.
  2. Inflation: India's headline inflation picked up to an annual 6.84 per cent in February, but non-food manufacturing inflation, which the RBI uses to gauge demand-driven price pressures slowed to 3.8 per cent, the weakest pace since March 2010.
  3. Deficit: Finance Minister P. Chidambaram pledged to rein in the fiscal deficit at 4.8 per cent of gross domestic product in the year to end-March 2014. C Rangarajan, chairman of the Prime Minister's Economic Advisory Council last week said the central bank should take notice of action taken by the government on fiscal front to contain fiscal deficit when deciding on the rate cut.
  4. Consumption: Car sales slumped 25.7 per cent in February, the biggest fall in more than 12 years as sluggish economic growth weighed on demand. A cut in interest rates may lower retail loan rates driving the consumption sector.
  5. RBI commentary: In his latest speech, the RBI governor commended the government for adhering to promised fiscal deficit targets in FY13, as well as for embracing a fiscal consolidation roadmap in the medium term. The governor stated that subsidy reductions are unlikely to translate into higher inflation. He also said that the risk of the current account deficit widening further because of the stimulus offered by the rate cut is much less than apprehended for a host of reasons.
(With inputs from Reuters)