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RBI May Do the Expected, Cut Policy Rate by 25 bps

RBI May Do the Expected, Cut Policy Rate by 25 bpsGold Silver Reports — RBI May Do the Expected, Cut Policy Rate by 25 bps — Borrowers can look forward to cheaper loans as most bankers expect the Reserve Bank of India, backed by the newly formed Monetary Policy Committee (MPC), to cut the policy rate by 25 basis points in its bi-monthly credit policy on Tuesday. 

The central bank to cut the policy rate, while the rest feel the rates may remain unchanged as the country steps into the league of developed nations by having a panel to decide policy rates. “There are structural factors for price stability, which are consistent with a case for a rate cut,“ said Saugata Bhattacharya, chief economist at Axis Bank. “While a normal monsoon looks to have stabilised prices, capex still remains weak with low credit demand,“ he said.

“There are indeed upside risks to inflation, be it the Seventh Pay Commission payouts by states or a gradual rise in global commodity prices, but….(they) are unlikely to take inflation beyond the upper target of 6%,“ Bhattacharya said.

Retail inflation, a key factor the central bank considers in deciding its policy rates, was at 5.05% in August, the lowest in six months.

More than a month ago, India had adopted an inflation target of around 4% in the next five years.The consumer inflation target for RBI until March 31, 2021, is fixed with an upper tolerance level of 6% and lower limit of 2%.

Tuesday’s monetary policy will be the first under the new monetary policy decision process, which conforms to global standards. The MPC consisting of six members, including new RBI governor Urjit Patel, will debate to decide on the rate action. If the panel decision is split, then the governor will have a casting vote to take the final call.

“RBI has provided enough liquidity (through open market operations),“ said NS Venkatesh, executive director at Lakshmi Vilas Bank. “With busy credit season setting in, it makes sense to extend the accommodative stance to spur economic growth,“ he said.

RBI has been conducting open market operations through bond purchases, a move that injects cash into the banking system, which has now turned into surplus after prolonged deficit.

Bank loans have grown less than 10% so far this year, while India’s gross domestic product (GDP) grew at 7.1% in April-June, the lowest in six quarters. A rate cut is seen supporting the country’s growth outlook. “With a good monsoon, CPI inflation is likely to follow a downward path,“ said Soumya Kanti Ghosh, chief economist at State Bank of India. “It is now to be seen how RBI perceives the country’s growth outlook amid global uncertainties,“ he said.

In the past two months, the benchmark bond yield fell about 20 basis points, pushing prices up as investors turned bullish on rate cut hopes. Moreover, this also helped transmit the central bank’s past rate reductions.

The RBI has two objectives -to reach its 5% inflation target in early 2017 and keep real rates (the difference between repo and retail inflation) at the 1.5-2% range, HSBC said in a report. “Marrying the two would open up space for easing by 50 bps. We expect a 25 bps rate cut at both the December and February (2017) policy meetings,“ it said. — Neal Bhai Reports

RBI May Do the Expected, Cut Policy Rate by 25 bps

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