Given this development and the ongoing clampdown on black money via the demonetisation route, will the RBI
cut interest rates in its upcoming monetary policy review tomorrow? Here is what top research houses and brokerages expect.
We expect a 25 bps reduction in the repo rate
in the upcoming policy review in December 2016, followed by one more cut of a similar magnitude up to June 2017. Moreover, the Reserve Bank of India (RBI) is likely to outline measures to manage the systemic liquidity, which would be of interest to the banks, and provide some timeframe by which cash liquidity would increase, that would be of significance to the public.
With the CRR
move, the RBI
has bought itself room to suck out about Rs 10.2 trillion, or Rs 10.2 lakh crore (Rs 3.2-lakh crore via incremental CRR
and Rs 7-lakh crore via using government bonds) from the banking system. As per our calculations, this should suffice for now, but if additional need arises, the RBI
can resort to additional measures like issuing special bonds.
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If the RBI
believes than lending rates need to fall over time, in order to support growth and recovery, (especially given some growth drag following demonetisation), cutting the repo rate
may provide a nudge. We are expecting a repo rate
cut in the December 09 policy meeting.
BANK OF AMERICA-MERRILL LYNCH
We expect the RBI
to cut policy rates by 25 bps on December 7 (and April) as the conversion of black money into deposits should allow banks to cut lending rates even in October - March busy industrial season. In out view, the case for a rate cut grows more complelling. We see further 30bps risk each to our 7.4% FY17 and 7.6% FY18 groqth forecasts with demonetisation to hurt activity in December as well.
The immediate impact hike in CRR
will cause liquidity to tighten and send bond yields on a northward blip. However, more liquidity is expected to make way into the banking system in the coming days in the aftermath of demonetisation, which will ease the pressure on yields. Also, the move, as the RBI
said, is ‘purely temporary’ and will be reviewed over the coming fortnight.
The other impact is on interest rate
transmission. Banks could delay cutting their lending rates given that they have promised at least 3-4% interest rate
to savings account depositors, but will be not be receiving any interest on the deposits impounded for CRR.
Also Read: Banks slide on RBI deposit move
Since the last monetary policy review in October, the downside risks to growth have risen and that to inflation have subsided. The fall in the value of rupee could exert some upward pressure on the imported component of inflation. We believe the odds are in favour of a 25 bps repo rate
cut to 6%.
The expectation so far has been that the RBI
will lower the repo rate
aggressively in the December policy by 50 bps. This may be deferred till stability is achieved in the system. Depending on further RBI
action or announcements in the period running up to the policy, our expectation on rates would be moulded.
We foresee a 25-50bps cut in repo rate
in the forthcoming monetary policy review on December 07, 2016. We lean towards a 50bps cut for the simple reason that even before demonetisation we were seeing the rising possibility of 50bps cut spread over the next two - three policy reviews, given that the RBI
had lowered its assessment of neutral real rate and inflation was expected to be lower than RBI’s indicative trajectory. However, post demonetisation, near term risks to both inflation and growth are tilted towards the downside. Thus, we think, it makes sense to front-load the monetary easing to limit the downside from demonetisation.
In terms of the monetary policy signals, we do not believe any strong inferences are to be drawn from a cut in CRR. After all, the RBI
itself expects the recourse to this measure to be temporary. We retain our assumption that RBI
will cut the benchmark repo rate
by 25bps to 6%, while highlighting the downside risks to its growth projections. RBI
is unlikely to force pedal to the metal thereafter in our view even as the scale and durability of the negative growth shock is still to be known.
Our underlying assumption is that Government is more likely to boost its expenditures, helped by the potential distribution of substantially higher dividend from the RBI, even as the quantum as well as the mechanics of distribution is far from certain at this stage.