RBI monetary policy today: Will there be another rate cut?
Contrary to the consensus, some market experts are pinning hopes that RBI may cut rate. Here are 3 charts to show why it may happen.business Updated: Dec 06, 2017 08:13 IST
The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to keep interest rate unchanged on fears of rising inflation.
All of the 15 economists surveyed by Mint, expect RBI to keep the repo rate—the rate at which the central bank lends to banks—unchanged at 6%. One basis point is a hundredth of a percentage point.
But against the consensus, some of the market participants still expect RBI may cut rate, mainly to give further boost to economic growth, which is in a recovery phase.
Here are their reasons:
After five consecutive quarters of deceleration, GDP growth quickened to 6.3% in July-September, suggesting the economy has survived demonetisation and the goods and services tax, which was rolled out on 1 July. However, there exists an output gap which means economic growth still remains below its potential.
Policymakers arguing for a rate cut say that real interest rates (those adjusted for inflation) are higher in India, and that is proving to be a hindrance for the economy to reach its potential growth level.
In a recent interview to Bloomberg, Ashima Goyal, a member of Prime Minister’s Economic Advisory Council, said that India does not need a real rate of more than 1%. RBI’s assessment range is 1.25-1.75%.
She added that the RBI’s notion that keeping rates higher will anchor inflation expectations has worked against them and proved to be a drag on growth.
Though still in surplus, liquidity in the banking system has tightened considerably and is expected to remain tight till March. Apart from RBI’s liquidity operations, lower government spending, higher currency in circulation during festival season and ahead of state election also contributed to the liquidity tightness. This, along with fears of fiscal slippage, has led to hardening of yields on bonds. Some market participants believe that a rate cut would give some relief as yield would fall and lead to lower borrowing cost.
Higher yields also impact banks’ earnings because of statutory liquidity ratio (SLR), or the proportion of deposits that banks need to invest in government bonds. The ratio currently stands at 19.5%. However, due to lower credit offtake, banks have invested more in government securities. According to estimates of Bloomberg Economics, apart from the regulatory mandate, banks’ excess holding of such bonds now stands at around Rs11.5 trillion.
A significant portion of this have to be marked to market and eat into the profits of banks when yields are hardening. Hence, a rate cut can benefit the stressed loans-laden banks. According to Abhishek Gupta, economist at Bloomberg Economics, one percentage point fall in the 10-year benchmark government bond yield would lead to roughly a 7% capital gain on such securities.