RBI may go for 50bp cut in Policy Rate in FY16

 The Dollar Business Bureau By leaving the key policy rates under the liquidity adjustment facility unchanged in is first bi-monthly monetary policy statement for FY16, the Reserve Bank of India (RBI) has taken a right step in the right direction, said India Ratings & Research rating agency. The repo rate, reverse repo rate and marginal standing facility rate will remain at 7.5%, 6.5% and 8.5%, respectively. The rating agency went on to add that the government is trying to improve the ease of doing business through various policy and legislative initiatives; however, the real impact on ground in the form of an investment pick-up is not visible. The two policy rate cuts (25bp each) in 2015 have not resulted in a cut in lending rates by banks, which have remained in the 10.00%-10.25% range from November 2013. However, at the upper end, the deposit rate of over one year maturity declined to 8.75% in March 2015 from 9.25% in March 2013. The agency reported that it believes interest rate is necessary but not a sufficient condition for investment. Investment revival is contingent on how quickly demand revives. Initially, growth momentum will come from consumption, and once demand stabilises and causes an optimum capacity utilisation, investment will pick-up. RBI expects Indian economy to grow 7.8% yoy in FY16 from 7.5% in FY15. Uneven growth is resulting in central banks pursuing a heterogeneous monetary policy across the globe, the agency said and added that, while European and Japanese central banks are continuing with a loose monetary policy, US Fed is on the verge of tighten its monetary policy stance. While it was widely expected that the US Fed will start monetary tightening from June 2015, it is likely to delay its decision of tightening to 4Q15. Indian rupee was under severe pressure in mid-2013 due to a high current account and dwindling capital inflows. However, it is one of the best performing emerging market currencies in 2015. With increased reserves and RBI’s intervention in forward currency market, the agency feels that US monetary policy tightening will have a minimal impact on India. RBI’s guidance to banks on base rate calculation will bring in more transparency and efficiency in the banking system. The calculation of base rate based on marginal-cost-of funds will result in a faster transmission of monetary policy action into the real economy. So far, neither consumers nor manufacturers have benefitted from the 50bp cut in policy rate in 2015, the rating agency concluded.    

This article was published on April 7, 2015.