RBI- Rate cut likely in early 2015
The Reserve Bank of India (RBI) held interest rates steady as widely expected at a policy review and said it could ease monetary policy early next year provided inflationary pressures do not reappear and the government controls the fiscal deficit.
As if in response, the government leveraged the recent drop in the price of oil to increase excise duty on petrol by Rs.2.25 a litre and diesel by Rs.1 a litre without affecting the end-price of the products. The move is expected to boost government revenue by around Rs.4, 000 crore by the end of March 2015. The hikes are the second since mid-November.
The repurchase or repo rate, at which RBI lends overnight funds to commercial banks, stays at 8% and the cash reserve ratio, or the portion of deposits that lenders need to keep with the central bank, remains at 4%, as governor Raghuram Rajan waits for a confirmation that low inflation is here to stay. A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle.
The next monetary policy statement is due only in early February, but RBI’s statement that a change may be possible outside the review cycle indicated that a cut in the repo rate could come even earlier, cheering the bond market. One basis point is one-hundredth of a percentage point. Bond yields fell below 8% for the first time since 22 July 2013. The yield on the benchmark 10-year bond closed at 7.97%, down from 8.06% on Monday.
Bond prices and yields move in opposite directions. RBI’s decision means that commercial banks will hold their main lending rates steady; still, bankers didn’t rule out a drop in home and automobile loan rates.
Jaitley has called for a rate cut to make capital cheaper and spur investment in an economy that grew at less than 5% in each of the past two years. Gross domestic product grew 5.3% in the three months ended September, slowing from 5.7% in the preceding quarter; inflation based on the consumer price index decelerated to 5.52% in October, the lowest since the series began in January 2012, and oil prices collapsed to four-year lows below $72 per barrel. Inflation has been helped by both moderation of food prices in India and also the global oil prices.
In a late evening statement, the finance ministry said the government and RBI will work on a framework to institutionalize the gains on inflation. The ministry said that it looks forward to RBI supporting a growth revival. Explaining its decision to keep rates steady, RBI said that while inflation had been receding steadily and current readings are below the January 2015 target of 8% as well as the January 2016 target of 6%, the key uncertainty is the durability of this upturn. Inflation is not a one-way street. There is a need to hit the 2016 target, deliver the economy into whatever new regime the government proposes, that is what has driven the policy today and in no way is it pre-determined.
At a media briefing, Rajan clarified that a review outside of the regular policy cycle does not mean the central bank is bringing uncertainty back as a policy tool. It should be interpreted as our own willingness that once we have enough information, we will make a move. Sometimes, the information comes in between policy cycles. The central bank’s immediate target is containing consumer price inflation at 8% by January, which has been already achieved. RBI is targeting lowering inflation to 6% by January 2016 and eventually anchoring inflation close to 4%, plus or minus 2 percentage points.
RBI also gave banks more say in the loan restructuring process and said company promoters will now have to put more equity than the present 10%. But banks will have the flexibility to decide how much equity they want the promoters to infuse on a case-to-case basis. Rajan, who recently described so-called willful defaulters as freeloaders scrounging off taxpayers, was also critical of company promoters taking the banking system for a ride. There is a category where promoters are deliberately standing in the way of recovery and some of them are actually frauds where money has been taken out of the business, money transferred abroad.
RBI in November showed that expectations are that all economic parameters will see an improvement in 2014-15 while interest rates come down. They expect economic growth in India to improve to 6.5% in 2015-16 from an estimated 5.5% in the current fiscal year. Credit growth is expected to improve to 15% in the next fiscal from a median prediction of 14% in the current year. Expectations are that the repo rate will ease by 50 basis points (bps) to 7.5% in 2015-16 from 8%.