RBI likely to keep interest rate unchanged
The expectations of a status quo are despite a moderation in growth and easing inflation.
The central bank may instead focus on greater liquidity, or cash availability, in the system, according to an ET poll of 23 market participants, who do not expect any rate action in the fifth bi-monthly monetary policy meeting to be held on Tuesday and Wednesday. Increasing the cost of funding could cloud the country’s growth prospects, the participants feel.
“Given the expected growth weakness, an extended pause in rates seems likely,” said Saugata Bhattacharya, chief economist at Axis Bank. “The RBI has to infuse significantly more liquidity into the system in the coming months, which in turn, may help increase credit flows.”
Two participants in the survey — AU Small Finance Bank and Edelweiss Finance — expect a 25-50 basis point cut in the cash reserve ratio, the portion of deposits that banks are mandated to keep with the central bank without interest. This is now set at 4%, which translates into about `4 lakh crore. India’s gross domestic product grew at 7.1% in the three months ended September after expanding 8.2% in the April-June quarter.
“The US Fed policy influenced the calibrated tightening stance in earlier RBI policy,” said Abheek Barua, chief economist at HDFC Bank. There could be a possibility of a rate cut cycle next year if a combination of global and domestic factors (Fed policy/global crude/fiscal deficit) changes with the evolving situation.”
Since October, global crude oil prices have slumped about 30%, reducing India’s oil import bills and fuel prices.
The benchmark bond yield has dipped 50 basis points since then. The US Federal Reserve, too, is seen restraining the pace of rate increases next year as the country’s growth slows. “The more interesting aspect of the meeting will be the deliberations on liquidity in the banking system, which has almost persistently been in a deficit,” said Shashank Mendiratta, an economist at ANZ Bank. “The central bank may lower its inflation forecast, given the easing food and fuel prices as well as growth momentum.”
Retail inflation, as measured by the Consumer Price Index, was at 3.31% in October, compared with 3.7% in September. At current levels, inflation remains below the mid-point of the 4% (+/-2) target set by the Monetary Policy Committee of the RBI. “MPC’s assessment on global growth amid trade tensions and domestic growth post developments in the financial sector will shape market expectations of future inflation and thus policy rate trajectory,” said Anubhuti Sahay, a senior economist at Standard Chartered Bank.
India’s banks have been net borrowers from the RBI since October 8, with the daily deficit — or excess of borrowing over lending — as high as `1.4 lakh crore.
The rupee, which hit a record low of 74.48 on October 11, appreciated almost 6% against the dollar in November and was the best-performing Asian currency last month. This has given the RBI an opportunity to narrow the liquidity gap by buying dollars and infusing rupees into the system, a common strategy when the currency appreciates. At the time of the rupee’s slide, the RBI did the opposite by selling dollars.
The RBI’s intervention is intended to curb volatility in the rupee’s value. “The key focus of the RBI’s policy would be addressing liquidity concerns,” said Shubhada Rao, chief economist at Yes Bank. “In addition to adding durable liquidity through OMOs (open market operations), the RBI’s focus would also remain on addressing liquidity concerns of niche segments like NBFCs.”
The RBI has announced `1.7 lakh crore of open market operations to purchase government bonds from the market. “Expectations for rising inflation and rate hikes have been pared, with real rates at elevated levels. This provides the RBI the leeway to hold rates unchanged in FY19,” said Radhika Rao, an economist at DBS Bank.
Foreign portfolio investors have resumed purchases of domestic securities and put in a net `11,595 crore in November, the highest monthly inflow in this financial year.