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Posted by: Deepa Vasudevan on Wed, Aug 5th, 2015

No reason for a rate cut

The RBI kept policy rates constant in its Bi-Monthly Monetary Policy Review on August 4, 2015. Here are the main reasons why further easing was not called for at this time:

  1. Inflation risks remain

    It’s true that international crude prices are falling, and WPI inflation is falling with it. It is also true that overall food inflation is not too high (5.7% in June based on CPI). But prices of some food components- especially protein rich items- are starting to rise. This may be a one-off spike- but after prolonged high inflation in protein items that India suffered in 2012/13 the RBI is understandably wary of stoking inflation.

  2.  

  3. Monsoons not completely normal, impact on agriculture uncertain

    The IMD has forecast a below-normal monsoon this year. As on August 4, 17 of the country’s 36 sub-divisions had received deficient rainfall; 12 had normal rainfall; and the remaining had excess rainfall. The final impact of this rainfall pattern on sowing and harvest is uncertain.

  4.  

  5. Rate cuts do not necessarily boost credit

    Repo rates have been cut by 50 basis points so far this year, and base lending rates of banks have dropped by about 30 bps.  But growth in bank credit is stuck at below 10%, where it has been since 2014. Both demand and supply side factors are to blame. Banks are not keen to lend because they are saddled with a huge amount of bad loans. Borrowers are not queuing up for loans either, for reasons ranging from stalled projects to poor infrastructure support to falling demand. Put together, the flow of bank credit that should kick start the revival is just not happening, despite earlier rate cuts.

  6.  

  7. US interest rate hike imminent, BoE may hike rates too

    The US Fed appears on track to normalize rates by the end of this year. The Bank of England has also indicated the possibility of a rate hike. On the other hand, Europe and Japan are easing desperately, hoping to stimulate their economies out of disinflation and low growth. The world is split along two divergent monetary paths, and emerging economies such as India will find themselves caught in the middle if they do not calibrate their policies with great care. There may be a need to raise rates later if the US rate hike leads to large capital outflows; it is better for the RBI to wait and watch, rather than cut now and increase again quickly.

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  9. Short term liquidity not a constraint

    The markets are not liquidity constrained at the shorter end. In fact, RBI has been sucking out excess liquidity from the market through open market operations.

 

There are enough reasons for holding the repo rate constant; none except the “Feel Good” factor for reducing it. Acting on some of the suggestions made in the monetary policy, such as improving the availability of power and land, or increasing public investment, will probably do a better job of improving market sentiment than a token cut in repo rates. 

Rajendra Gadadhar Dolhare on Mon, Aug 10th, 2015 12:40:59 pm

Thanks.Very useful information to update the knowledge of IFA community.I appricate your initiative.

Ramesh Kumar Nanjundaiya on Sun, Aug 9th, 2015 6:35:38 pm

Good Analysis - my views RBI will closely monitor the following economic activities until Q4 2015 before even thinking of proposing a rate cut: 1. Improvement in the agricultural activities (in specific states) where monsoon has been adequate so far. 2. Crude price being low, RBI would like to see an increase in real income. 3. RBI wishes that banks would reduce lending rates (across all lending products) as their have the benefit of repo rate reduction by 75 basis points since January 2015. More focused lending would seem the best way to prop up the economy. 4. RBI would be comfortable to see an inflation rate of say 4% to take quick steps to cut rates. This could happen in the next 6 to 9 months time frame. 5. Today for the RBI food inflation is a concern, they may not think of cutting any rates till December 2015.

joseph francis martyres on Sat, Aug 8th, 2015 4:44:46 pm

A valued analysis of the recent announced policy. The explanation that the US FED rate hike would in fact even prompt a rate hike here and reverse the trend is well explained.

jatinder pal singh on Sat, Aug 8th, 2015 2:25:52 pm

yes its tru . RBI governer has done good in past . He is watching banks & market position closely . veeto power should be maintained

Vishal Rastogi on Sat, Aug 8th, 2015 1:45:20 pm

Very imp. info shared.....Thanks !

KISHORE JAYANTILAL BHARMANI on Fri, Aug 7th, 2015 9:46:51 am

NO DOUBT COMMODITY PRICE LIKE CRUDE DROP LOWER BUT SYSTEMS HAS STILL NOT REFLECTED. AND HENCE CPI IS STILL HIGHT. AND THEREFORE CENTRAL GOVERMENT IS ON RIGHT PATH

Alok Garg on Fri, Aug 7th, 2015 5:31:08 am

Thanks for the write up. One more reason I would like to add, Banks are not passing the actual amount of cut to the general public/Borrowers, this was commented by our Hon'ble RBI Governer in the previous policy. At the same time RBI Governer in its commentary is hoping to cut the rates after reviewing the status of monsoon & other economic parameters before next RBI monetary policy. Thanks

Vishal Avasthi on Fri, Aug 7th, 2015 5:05:37 am

Yes i strongly agree. Mr. Raghuram Rajan is a capable person & he knows what he is doing, but if government takes the power from RBI to control rates then it will indeed be the most unfortunate happening in the history of Indian economy & it will send a negative impression to the rest of the world.

Prasun Kumar Chaudhuri on Thu, Aug 6th, 2015 11:00:00 pm

In my opinion, cost of capital is not at all a major issue for expansion / growth of manufacturing or service sector in India. Capital is always available in surplus so much so that it is often used in an inefficient manner. Our industry must be competitive and efficient. Please review the performance of Defence PSUs. They are symbols of inefficiency and non-transparency. Government is not proceeding ahead with the stake sale of such organisations. Sale of small stakes of Defence PSUs including factories of OFB will trigger accelerated growth of Indian manufacturing sector and resulting in stronger economy. Non-transparent operation is predominant in this sector. This single action can substantially improve Indian industrial growth rate and provide lot of investible capital. Another issue of concern is achieving a surplus in external trade. Control of inflation is one of the most important functions of RBI and it is able to control inflation brilliantly. RBI must take care of vast rural and urban population who have very small monthly income. The standard of monetary policy formulations, exchange rate control etc. is best in whole world. May I caution RBI that Indian TV specially the economic channels are totally controlled by big industrial houses and broker community. They are continuously demanding interest rate cut to favour the owners of the TV channels. RBI must continue its act of unbiased policy formulations without bothering the media and compulsions of political leaders.

Atul Kamdar on Thu, Aug 6th, 2015 10:42:02 pm

Very well explained. The major factors have been properly highlighted.

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