The Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC) is unlikely to tinker with the policy rate on the December 5-6 review, as the inflationary pressures and normalisation of policies by global central banks would keep the Indian central bank cautious. None of the 10 participants of a Business Standard poll on monetary policy expected a change in rates next week, with some even cautioning that the rate-cutting cycle could be over for India. The RBI may have “missed the opportunity” for a cut, said Rupa Rege Nitsure, group chief economist of L&T Finance. “The period of January-February, 2017, was the most opportune time for aggressive policy easing,” she said. Inflation was on decline that time, and in June, the consumer price index (CPI)-based inflation reached its record low of 1.46 per cent. The RBI targets CPI, or retail inflation, and strives to keep the medium-term inflation anchored at around four per cent. The retail inflation in October was at 3.58 per cent, and according to many economists polled, the reading could be around 4.5 per cent for the rest of this financial year. Source: Bloomberg, Compiled by BS Research Bureau However, weakness in the economic growth, as measured by the gross value added (GVA), could be a strong incentive to cut rates, but that would fan the inflation further. Compounding the problem is the shrinking liquidity of the banking system. On a net basis, banks parked only Rs 42,839 crore of their excess fund with the RBI. This is far less than Rs 6 lakh crore of excess liquidity they witnessed in March, on account of demonetisation. As a testimony to the shrinking liquidity scenario, State Bank of India (SBI), which received the lion’s share of deposits after demonetisation, increased interest rates on its bulk deposits by one percentage point (100 basis points). This would also push up lending rates eventually and demolish any hope of transmission by banks even if the RBI cuts its policy rate. The tightness in liquidity has happened because of aggressive sterilisation undertaken by the RBI, to keep inflation under check, but SBI’s rate hike showed that that sterilisation has hardened yields in the money market and dated securities market, making fundraising costlier for both the government and private corporations alike. One good thing going for the Indian economy is India's rating upgrade by Moody's by one notch. However, Standard & Poor's reiterated its old rating on the country. Nevertheless, inflation would be a key concern for the central bank going forward. “Inflation is going to be above four per cent for the rest of the financial year.
If there is no broad and sharp slowdown, it is very unlikely that the MPC will move from its stance,” said Gaurav Kapur, group chief economist at IndusInd Bank. GVA was at 6.3 per cent in the second quarter of the present fiscal year, compared with 5.7 per cent in the April-June quarter. The policy repo rate is now at six per cent, and it may stay that way in this cycle, said Madan Sabnavis, chief economist of Care Ratings. “There are inflationary fears. We already know that most of the non-food components are showing an uptrend, while vegetable prices, along with crude, have been increasing. I think we are done with it (rate cut cycle). Inflation will likely remain at 4-4.5 per cent level in the coming months, but if inflation falls to three per cent or so, there is a chance of a cut,” added Sabnavis. According to Anubhuti Sahay, chief economist of Standard Charatered, the earlier concerns of the RBI would continue to remain in this policy as well. “The RBI in the past has highlighted its concerns on the possibility of fiscal slippage, volatile external environment, besides inflation. Those factors have not changed. Besides, major central banks are normalising their monetary policy. That would keep the RBI on a cautious note,” Sahay said. Soumyajit Niyogi, associate director of India Ratings and Research, said while a pause is a near certainty, the market interest rates would be closely dependent on RBI’s actions. “Two major developments —proposed public sector banks' recapitalisation and improvement in ease of doing ranking — would likely address two critical areas, which are investment cycle and supply side dynamics. Now, with the close to neutral system liquidity and assumption of continuation of accommodative stance, scope for incremental softening of overall interest rates is now left with only central bank’s action,” Niyogi said.