Case for rate-cut, INDIA...

After delay in hike by the US’ Fed, analysts, now, are trying to figure-out what might happen to the Indian scene where inflation and inflationary expectations are on a downside with fiscal- rectitude commitment by the government because it directly increases demand in the market by increasing employment and wages/incomes and inflation under all supply-constraints, higher interest-rates too...

The government was responsible for too much demand creation in the economy... Public-spending mainly aims at the poor which increase their consumption who almost spend all of their wages which increases the value of multiplier... Public-spending on the poor directly adds to demand and therefore to inflation and higher interest-rate which crowds out private-investment... However, the crowd-in effect of infrastructure can not be ruled-out which also needs lower interest-rate so the government could borrow more and spend... Therefore, low interest-rate is a pre-requisite for more investment and supply... Lower interest-rate also reduces cost of investment and inflation, also by increasing the supply...

Nonetheless, monetary-policy manages supply and demand, and, inflation and unemployment by changing money-supply and interest-rate which depends upon inflationary expectations... Interest-rate depends on inflation and inflationary-expectations... In INDIA the RBI is also trying to mould these two by adopting inflation-targeting recommended by the Urjit Patel committee-report... The RBI has set an inflation glide-path to shape expectations about inflation and interest rate... The central-bank has committed itself to lower inflation... And, low interest-rate is also helpful in taming inflation because it would increase supply... Low cost of capital is positive for supply which is also important for low prices... Cost of capital and inflation might go down...

 It is still upto the Governor to decide for a rate-cut, since the monetary-policy-committee is yet to arrive which might strip the chief’s veto over the committee... The governor is still independent to deliver a rate-cut out of the policy date... However. September inflation data might be expected by the RBI on which the base-year-effect is yet to resolve...  Nonetheless, base year effects off will increase inflation which may deter RBI from cutting rates aggressively... Moreover low inflation is a sin-e-qua-non for low interest rates, RBI has cleared repeatedly...

We are in a rate-cut cycle because we are expecting prices to go down... Interest-rate is set according to inflation expectation, both long-run and short-run... Nevertheless, we are expecting lower inflation ahead therefore everybody is expecting a rate cut... And as the cost of investment will go down supply may improve...