Only half per cent rate cut this year: Analysts
Since Raghuram Rajan took over, the RBI has cut interest rates by 1.5%, but banks down the line have passed only about half of it to its customers.
Many economists feel that even if retail (CPI) inflation is tamed at 5% level (RBI’s target by March 2017), the room available for further rate cut is very limited, at least in the next one year. At best, they foresee a rate cut of maximum half a percent (50 basis points) in the immediate future. They explain that the RBI’s stated policy also ensures that savers get at least 2% (real) interest, over and above the level of retail inflation, on their savings. Assuming that a good monsoon coupled with the astute food management helps to tame the retail inflation at 4%, “the RBI can at best reduce the repo rates to 6% to ensure that real interest remains 2% above the CPI inflation,” says Sunil Sinha, principal economist, India Ratings & Research. Upside risk to food inflation, elevated services inflation and recent spike in oil prices have restrained the RBI to put on hold the cost of money at 6.5% which many stakeholders feel is too high to encourage investments in the economy.
Retail inflation rose to 5.4% in April from 4.8% in March while food inflation jumped to over 6.3% from 5.2% in the previous month. Pulses inflation continues to hover at over 35% in the recent months and shows no sign of improvement. In fact, pro- duction of pulses has fallen for the second consecutive year. While good monsoon can certainly help but India’s overwhelming demand for food proteins do not match its production capacity. There was also a firming of inflation relating to edible oils, spices and non- alcoholic beverages. The RBI has also raised concerns about services inflation ( house rents, water charges, tuition fees and taxi/auto fares) which it feels has remained sticky at over 5%.
Analysts feel that stakeholders in the economy might have to endure high interest rates unless banks pass on the cuts made by the RBI in past couple of years. Since Raghuram Rajan took over, the RBI has cut interest rates by 1.5%, but banks down the line have passed only about half of it to its customers. The RBI has been asking the banks to pass on the cuts already delivered. If that happens then it would surely give a benefit of over 80 basis points (0.8%) relief to consumers. As the RBI moves the banking system from a liquidity deficit to liquidity neutral, “we expect banks’ cost of funds to fall, which should translate into lower lending rates over time,” says Nomura and hence, we expect policy accommodation to occur more via stealth (liquidity easing) in the coming months, rather than through outright repo rate cuts.