Play­ers Await Cut Call from RBI for a Block­buster Show

FM’s fis­cal pledge, eas­ing in­fla­tion make case for a rate cut, say ET poll par­tic­i­pants

The Economic Times - - Front Page - Saikat.Das1@ times­

Mum­bai: The Re­serve Bank of In­dia is likely to cut the pol­icy rate by a quar­ter per­cent­age point, with the gov­ern­ment ad­her­ing to fis­cal pru­dence amid growth op­ti­mism and eas­ing in­fla­tion, ac­cord­ing to an ET poll of 18 mar­ket par­tic­i­pants. RBI is sched­uled to an­nounce the mon­e­tary pol­icy on Fe­bru­ary 8, a week af­ter the Bud­get was un­veiled.

“A con­ser­va­tive fis­cal pol­icy, eas­ing in­fla­tion tra­jec­tory and short-term risks to growth keep the door open for fur­ther eas­ing,” said Rad­hika Rao, a Sin­ga­pore-based econ­o­mist at DBS Bank. “The gov­ern­ment plans to ad­here to fis­cal dis­ci­pline while also mak­ing room for in­clu­sive growth poli­cies.”

Fi­nance min­is­ter Arun Jait­ley’s pledge to bring the fis­cal deficit back on track de­spite some de­vi­a­tion in the next fis­cal year has en­cour­aged ex­pec- Stan­dard Char­tered Bank, Deutsche Bank, DBS Bank, DCB Bank, IDFC Bank, Bar­clays In­dia, ICICI Se­cu­ri­ties PD, Bank of Amer­ica ML, Lak­shmi Vi­las Bank, Yes Bank, In­dia Rat­ings, Ko­tak Mu­tual Fund, Edel­weiss Fin, IIFL group, Ko­tak Se­cu­ri­ties

SBI, Axis Bank, AU Fi­nanciers

tations of fur­ther mod­er­a­tion in the pol­icy. Added to that is the gov­ern­ment’s plan to step up spend­ing on in­fra­struc­ture.

“Bud­get’s un­der­ly­ing phi­los­o­phy on fis­cal pru­dence too has un­der­scored a strong case for RBI rate cut,” said Shub­hada Rao, chief econ­o­mist, Yes Bank. “To­gether with eas­ing mon­e­tary pol­icy and fis­cal ex­pen­di­tures to­wards capex, this should push up the coun­try’s growth.”

The key con­cerns weigh­ing on the six RBI mon­e­tary pol­icy com­mit­tee mem­bers in seek­ing to push growth won’t be in­fla­tion but over­seas fac­tors, an­a­lysts said. These in­clude US pol­icy changes, rate in­creases by the US Fed­eral Re­serve and China’s growth out­look

“RBI's big­gest chal­lenge this year will be to strike a right bal­ance be­tween sup­port­ing growth and in­creased ex­ter­nal un­cer­tain­ties,” said Anub­huti Sa­hay, chief In­dia econ­o­mist at Stan­dard Char­tered. “Re­tail in­fla­tion is un­likely to pose any chal­lenge with eas­ing food prices and con­tained core in­fla­tion (ex­clud­ing gold)… In­creased in­fra­struc­ture and ru­ral al­lo­ca­tion are key pos­i­tives from the Bud­get.”

The cen­tral bank left rates un­changed at the last pol­icy an­nounce­ment on De­cem­ber 7, de­spite wide­spread ex­pec­ta­tions of a rate cut. Wed­nes­day’s pol­icy state­ment will also be keenly parsed for any­thing RBI has to say about de­mon­eti­sa­tion, which was an­nounced on Novem­ber 8. With the win­dow for de­posits of old notes at banks hav­ing closed on De­cem­ber 30, the cen­tral bank will have a bet­ter un­der­stand­ing of how much cash has come into the sys­tem.


Do­mes­tic debt se­cu­ri­ties could well lose their sheen in the event of the Fed­eral Re­serve rais­ing rates, thus nar­row­ing the dif­fer­en­tial with In­dian bonds, adding to RBI’s pol­icy com­pli­ca­tions. Dur­ing the fis­cal, the bench­mark bond yield has dipped by 110 ba­sis points, push­ing prices up. One ba­sis point is one hun­dredth of a per­cent­age point.

Re­tail in­fla­tion, a key trig­ger for rate ac­tions, has been in line with RBI’s 5% tar­get for March end. The Con­sumer Price In­dex dropped to 3.4% in De­cem­ber from 6% in July 2016.

Banks, mean­while, have slashed lend­ing rates across the board, em­bold­ened to pass on RBI’s pre­vi­ous rate cuts as de­posits of de­mon­e­tised notes have left the sys­tem flush with funds.

Over­all sys­tem liq­uid­ity is run­ning at more than Rs 5 lakh crore, ac­cord­ing to In­dia Rat­ings, against a deficit nearly a year ago. But with re­mon­eti­sa­tion pick­ing up, that’s ex­pected to re­cede ahead of the fis­cal year-end as with­drawal lim­its are eased, shoring up mar­ket rates, ex­perts said. “With com­mer­cial banks al­ready hav­ing cut their lend­ing rates by about 80-90 bps (ba­sis points) in one clip ear­lier this year, it is un­likely that they will re­duce the rates any fur­ther with­out the pol­icy rate be­ing low­ered fur­ther,” Kaushik Das, Mum­bai-based econ­o­mist at Deutsche Bank, said in a note.

In the cur­rent fi­nan­cial year, the cen­tral bank has col­lec­tively slashed the repo rate, at which banks bor­row short-term funds from RBI, by half a per­cent­age point to 6.25%.

“There has al­ready been sig­nif­i­cant lend­ing rate trans­mis­sion, which is ex­pected to per­sist in the near fu­ture,” said Sau­gata Bhat­tacharya, chief econ­o­mist at Axis Bank.

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