No interest rate cut if the RBI sticks to its own rationale, but SLR or even CRR could be reduced
RBI Watch Monetary Policy 2015-16
The government, its Chief Economic Advisor, and industry want a rate cut.
What is RBI's position?
I refer to the last para of my blog of April 14, where I indicated that RBI expects inflation to further fall to 4% by August, but then rise to close to 6% by end of the year (Governor's statement of April 7, para 12).
Since April, has the economic environment changed so much as to change the expectations of the RBI? The April CPI fell further to come in at 4.87%. Global growth continues to be weak, perhaps a little weaker than the perception in April, but there has not been a disflationary shock. At home, steady, but unspectacular, reform measures continue. So, in my view, there is no reason for the RBI to be more postive on the inflation front than it was in April.
Unless the RBI bows to public pressure, a rate cut is not likely. The reason is that, given RBI's real interest rule of 1.5 to 2%, if inflation rises to 6% by end of the year, then the policy repo rate should be at today's 7.5%.
Yes, a fall in the repo rate is quite possible towards the end of the year, if the expected inflation fall overshoots - i.e. if the rate falls below 4%. A good monsoon, which is just round the corner, is going to be critical for this to happen.
What about the banks? At the last policy statement meeting, Rajan clearly expressed his disappointment with the banks for not responding postively to the RBI's reduction in the repo rate from 8 to 7.5% with base rate cuts. He even went on to say that further rate cuts by RBI were dependent on the responsiveness of banks. On this count, it could be said that banks have responded with changes, albeit small, in the base rate - 12 major banks have changed their base rate mostly by about 25 basis points.
I do believe the RBI has scope to reduce Statutory Liquidity Ratio by 0.5 % or even the Cash Reserve Ratio. I would prefer the former. This would amount to further monetary loosening.
RBI Watch Monetary Policy 2015-16
The government, its Chief Economic Advisor, and industry want a rate cut.
What is RBI's position?
I refer to the last para of my blog of April 14, where I indicated that RBI expects inflation to further fall to 4% by August, but then rise to close to 6% by end of the year (Governor's statement of April 7, para 12).
Since April, has the economic environment changed so much as to change the expectations of the RBI? The April CPI fell further to come in at 4.87%. Global growth continues to be weak, perhaps a little weaker than the perception in April, but there has not been a disflationary shock. At home, steady, but unspectacular, reform measures continue. So, in my view, there is no reason for the RBI to be more postive on the inflation front than it was in April.
Unless the RBI bows to public pressure, a rate cut is not likely. The reason is that, given RBI's real interest rule of 1.5 to 2%, if inflation rises to 6% by end of the year, then the policy repo rate should be at today's 7.5%.
Yes, a fall in the repo rate is quite possible towards the end of the year, if the expected inflation fall overshoots - i.e. if the rate falls below 4%. A good monsoon, which is just round the corner, is going to be critical for this to happen.
What about the banks? At the last policy statement meeting, Rajan clearly expressed his disappointment with the banks for not responding postively to the RBI's reduction in the repo rate from 8 to 7.5% with base rate cuts. He even went on to say that further rate cuts by RBI were dependent on the responsiveness of banks. On this count, it could be said that banks have responded with changes, albeit small, in the base rate - 12 major banks have changed their base rate mostly by about 25 basis points.
I do believe the RBI has scope to reduce Statutory Liquidity Ratio by 0.5 % or even the Cash Reserve Ratio. I would prefer the former. This would amount to further monetary loosening.
