It could be fall season in March

By: | Published: December 3, 2014 4:45 AM

RBI holds fast on rates but signals cut in first quarter of 2015.

RBI governor Raghuram Rajan observed at a press conference that in the past, transmission hadn’t always taken place at the desired pace. (PTI)RBI governor Raghuram Rajan observed at a press conference that in the past, transmission hadn’t always taken place at the desired pace. (PTI)

With the Reserve Bank of India (RBI) signalling a turn in the rate cycle early next year, bankers said on Monday it was possible lending rates could start falling towards the end of the first quarter of 2015.

State Bank of India (SBI) chairman Arundhati Bhattacharya said the central bank would most probably trim rates after the Union Budget for 2015-16 was announced, possibly by as much a 50 basis points.

“Lending rates should trend down towards the end of the first quarter though there is a feeling that deposit rates also need to come down before that can happen,” Bhattacharya told a television channel, hinting that base rates may not be pruned immediately though spreads could be compressed to give borrowers relief. Indeed, given the surplus liquidity and the lack of takers, loan rates have been coming down, especially at the shorter end, reflected in rates on commercial paper.

Leaving the key repo rate unchanged at 8% after a review of the monetary policy on Tuesday, RBI governor Raghuram Rajan observed at a press conference that in the past, transmission hadn’t always taken place at the desired pace. However, the governor believes that as and when the policy stance changes, banks would drop rates meaningfully.

He pointed out that  interest rates in the system had come off. “Long-term bonds since July have come down by 60-70 basis points while short-term rates have come down because we have managed liquidity. Those are positives for corporate India,” Rajan said. The governor added that rates were high because of the high risk premium that was being demanded of some corporates because of their leverage and their inability or unwillingness to repay loans. “That cost should not be attributed to the RBI,” Rajan asserted.

Economist Rohini Malkani at Citigroup wrote that the central bank’s dovish tone was prompting the bank to maintain its view of cumulative rate cuts of 100bps by FY16, with the first rate cut in the January-March quarter. “That would thus maintain a positive real rate of at least 100bps over target inflation. We expect the 10-year yield to trend towards 7.50-7.75%,” Malkani wrote.

While the stock markets were disappointed there had been no cut in rates — the Sensex lost 116 points — bonds rallied, sending yields to a 16-month low of 7.97%, the first time since June 2013 that the benchmark rate has fallen below the policy rate. Dealers said bond yields are likely to drop by anywhere from 10-20 basis points in the next couple of months and by about 100-150 basis points over the next 12-18 months.

In his review of monetary policy, Rajan observed that while it would be premature to shift the stance at this point, an easing of the policy was likely early next year provided the disinflationary trend continued and the situation on the fiscal front was comfortable, including outside the policy review cycle. “We don’t want to be doing a flip-flop and would like more certainty on the disinflationary process,” Rajan said, adding that the central bank would be satisfied if the government met its fiscal deficit target for 2014-15.

By the RBI’s estimate, retail inflation is now tipped to hit 6% by March 2015 and the central bank believes that risks to this target are “evenly balanced”, as opposed to being on the “upside” in the September policy meeting. The governor mentioned that the proposed new monetary policy framework will soon be finalised in consultation with the government. Rajan said both parties were comfortable with the proposed inflation target of 4%, +/- 2%, beyond January2016.

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