Monetary Policy Review: By How Much Will RBI Oblige?

Will the Reserve Bank of India slash the repo rate?

By Ashish Pandey | Updated: Apr 04, 2016, 18:24 PM IST
Monetary Policy Review: By How Much Will RBI Oblige?

With just a day left for the first bi-monthly monetary policy of fiscal 2016-17 on April 5,markets are echoing with a big question: “Will the Reserve Bank of India slash the repo rate?”

The answer may be currently unclear, anticipation in the air (in addition to valuable convergence of domestic and global factors indisputably) commands the bourses to discount a rate cut in range of 25 basis points. So, a kind of subtle certainty is already prevailing in the air. But, what the exact number will be is a question worth mulling over.

Considering the present scenario, the Central Bank looks all the highly forthcoming in slashing rates post the fiscal restraint shown by the government in the budget.

The Reserve Bank of India (RBI) wanted the government to contain the high fiscal deficits which are primarily responsible for continuing inflationary pressures on the economy. The government did such by restraining fiscal deficit by 3.5 percent of the gross domestic product (GDP) for the present financial year and hence, the Central Bank should move towards lowering interest rates.

The situation is ideal for the RBI to go ahead and lower the rates especially when the bond market appears calm as 10-year government yields have come off by more than 20 basis points since the announcement of budget. Additionally, Consumer Price Index-based inflation has come under at a lower-than-expected 5.2 percent in February.Sliding crude & commodity prices and weak global scenario has lightened up hopes for a substantial rate cut all the more.

Industry also expects RBI to cut rates since manufacturing is still fighting excess capacity and industrial production data remains sluggish. In order to fire up weak investment climate a cut in interest rates is doctor’s prescription, as per them.

Bankers expect the RBI to cut rates significantly so as to address liquidity issue.This group is all the more optimistic following the recent reduction in small saving rates by the government Arundhati Bhattacharya, Chairman, State Bank of India, recently said,“We expect the RBI to address the issues of systemic liquidity. Currently, the issue of high volatility in currency holdings of public (both in the form of cash and jewellery) as well as the government’s cash balances with RBI is leading to volatility in system liquidity. To this end, the government’s cash balances may be placed with public sector banks, instead of with RBI, so that the cash remains within the banking system and does not create unnecessary volatility in money markets.”

On the global front, Fed hasn’t shown any contingency in reducing rates in the US and this further cements the case for the RBI.

A cut is more or less certain but what's important is the magnitude. If it's 25 basis points, well and good, but anything near 50 basis points will surely be a positive surprise. Wait for April 5 for the Raghuram Rajan and his team to unlock its cards.