As per the RBI’s own assessment, lowering interest rates from present levels looks less probable because of inflation risks arising from a less-than-normal monsoon that may be caused by a possible El Nino effect, in addition to political compulsions that buoy minimum support prices for agricultural commodities and compress administered prices for fuel fertilizers and electricity. Deep Mukherjee, an analyst with India Ratings & Research, also sees a possibility of further tightening of interest rates over the next year and a half. He says, “The normalisation of interest rates in the US by [mid] 2015 may put pressure on emerging market currencies, including Indian rupee, forcing action on interest rate front.” He adds: “Consumer price inflation [that] tends to fall two-three months before a general election moves back to pre-election levels post election.” This was a trend observed during the last six general elections.
Phani Sekhar of Angel Broking sees a strong possibility of fiscal disorder that El Nino may create in government finances. “The possibility of El Nino appears strong,” he says “which would bring down the agricultural growth rate.”
Since about half of India’s population survives on agriculture, it would call for higher food and fertiliser subsidies and some kind of loan waivers too. “As agricultural support to GDP goes down, the resultant low tax-to-GDP ratio would create pressure on the fiscal front,” he adds. Naturally, that means more borrowings by the Government—for consumption rather than for fixing the supply-side bottlenecks. This would leave less room for the RBI to lower interest rates.