1. RBI unlikely to relent to India Inc’s rate cut call

RBI unlikely to relent to India Inc’s rate cut call

Finance minister’s recent call to lower rates has revived expectations for cut in interest rate.

By: | Mumbai | Updated: November 8, 2014 8:46 AM
RBI had hiked repo rate by 75 bps to 8 pct between September 2013 and January 2014 and has been maintaining that level to check inflation. (Reuters)

RBI had hiked repo rate by 75 bps to 8 pct between September 2013 and January 2014 and has been maintaining that level to check inflation. (Reuters)

The strong pitch by Corporate India on the need to cut interest rates notwithstanding, indications are that the Reserve Bank of India may not oblige in the near term.

The RBI which has already indicated that  “it is too early for celebrations” and that “inflation has a long way to go”, has been draining liquidity from the system through its open market operations. The RBI has already conducted five reverse repo auctions between October 29 and November 5 to enable banks park close to Rs 1,45,000 crore with the central bank. It has planned another Rs 25,000 crore reverse repo auction on Friday. Banks are sitting on excess liquidity, indicating that demand for credit has fallen.

This is even as consumer price inflation, which at 6.46 per cent in September, had slowed to its lowest level since the data was first published in January 2012. Local banks are awash with liquidity and the yield on the 10-year benchmark bonds declined to over one-year low levels of 8.20 per cent, contributing to the clamour for a rate cut. The RBI had hiked repo rate by 75 basis points to 8 per cent between September 2013 and January 2014. Since then, it has been maintaining the 8 per cent level to check inflation.

“I agree with the RBI observation it’s too early to celebrate. The base effect will come into play from next month… last year at the same time inflation was at around 12 per cent. The US quantitative easing issue is yet to come. It’s too early to say time has come for the rate cut,” said Krishnamurthy Harihar, Treasurer, Firstrand Bank.

VG Kannan, MD & group executive, State Bank of India, said, “Markets are expecting a rate cut. Commercial paper rates and bond yields have fallen. And banks are carrying surplus liquidity.” Many banks have slashed the deposit rate in the wake of declining credit offtake. According to Radhika Rao, Economist, DBS Bank, pressure is mounting on the RBI to cut rates at its upcoming review meeting in early December, but the central bank  may not be swayed by the base effects-driven softening of inflation. Finance minister Arun Jaitley’s recent call to lower rates to encourage construction activity has revived expectations of a rate cut.

CPI-inflation1

This is not surprising. In fact, analysts expect calls for rate cuts to intensify as the December rate review approaches, when weak September quarter GDP numbers and further softening in consumer price index (CPI) inflation will be on hand. Against this backdrop of weak growth and falling inflation, the Reserve Bank of India (RBI) is likely to face mounting pressure to ease rates at the December meeting. That said, the RBI will look past these base-effect swings to focus on anchoring inflationary expectations and ensuring medium-term stability.

Will a rate cut boost investment? “To be sure, the monetary policy tool of cutting the interest rate is conventionally used to energise a flagging economy.  But this does not hold true under all circumstances. Our study shows that factors behind the recent slowdown in economic growth and investment in India have little to do with high interest rates,” Crisil said in a study.

FACT

The fact that the central bank is unlikely to abandon its anti-inflationary stance in a hurry is also a factor of the ‘base effect’, which is a determining factor in the slide in inflation during the current fiscal and is unlikely to wear off conclusively until March 2015, as captured in the accompanying chart. The result being that the CPI may climb back to around the 8 per cent mark by the end of this fiscal (March 2015), despite the tempering of food prices expected in the next couple of months. Against this backdrop, the RBI is expected to likely to keep the repo rate unchanged until early next fiscal, by when any lasting improvement in the inflation outlook is expected.

Tags: InflationRBI
  1. No Comments.

Go to Top