RBI to pause, but market to examine language closely

When the Federal Reserve is all set to tighten its monetary policy further

There is near unanimity that the Reserve Bank of India (RBI) won’t touch its key policy rate on Tuesday. However, the market would still examine the central bank’s guidance on a few key issues, including any hint of further accommodation at a time when the US Federal Reserve is set to tighten its monetary policy further and Britain is to decide whether it would be a good idea to stick with the European Union. All the 10 economists polled by Business Standard last week expected RBI to keep its policy repo rate unchanged at 6.5 per cent.

Even as not expected in the policy statement, the market would still want to get a hint of whether RBI Governor Raghuram Rajan would get a second term in the central bank. If not clarified, the post-policy press conference and the analysts call would be monitored closely, say bond and currency market participants.  Rupee has been choppy in the past few weeks after news about powerful leaders in the government rooting for Rajan’s ouster started floating. Rupee fell to 67.45 a dollar on June 1 on Rajan uncertainty, but on Monday, it closed at 66.97 to a dollar. (WHY RBI MIGHT PAUSE)

There are more tangible factors, as enumerated, in which the central bank’s take assumes importance.

Growth: The economy grew 7.6 per cent for the full year 2015-16 and at 7.9 per cent in the fourth quarter, surprising analysts. However, there are some apprehensions about the numbers and analysts would be inclined to read between the lines about the central bank’s growth projections for the current financial year. RBI, in the first bi-monthly monetary policy, said it expected the economy to grow at 7.6 per cent FY17. Any change from that, when the external environment hasn’t changed much, would be interesting.

Bad loans-wary public sector banks (PSBs) are getting loan-shy and this could be one of the points discussed in the policy. Credit in the January-March 2016 quarter for PSBs, excluding State Bank of India group, grew only 1.4 per cent, compared with 7.8 per cent the previous year.

Inflation: Wholesale price inflation surprised many, by rising 0.34 per cent in April, compared with minus 0.85 per cent in March. The retail inflation number, tracked by the central bank for policy purposes, stood at 5.39 per cent in April, from 4.83 per cent in March. Even as rainfall is expected to be good this year, inflation would likely firm up further, caution economists.

Bad debt: Analysts would be examining RBI’s take on the bad debt situation of banks, as the asset quality review in the past two quarters showed banks were under-reporting about 50 per cent of their bad debts. Gross bad debt in the banking system is now close to Rs 6 lakh crore and analysts would be looking out for RBI’s assessment of the situation, whether the bank balance sheet clean-up is nearly done or there are more in the offing.

Policy transmission: Even as RBI has lowered the policy rate by 150 basis points, banks have passed on just about half the cumulative rate cuts. This, even after the introduction of the marginal cost of funds-based lending rate calculation, which was supposed to transmit policy rates quickly to the end-rates charged by banks.

Liquidity: With the government increasing spending and RBI pumping in more durable liquidity in the banking system through secondary bond market purchase, liquidity deficit has fallen sharply to a Rs 2,287 crore, from Rs 2 lakh crore end-March. On Saturday, the system was also surplus of Rs 4,703 crore. This might not prompt the central bank to offer more open market operations (OMO) in bonds, but the market would want otherwise. “A status-quo decision from RBI and the absence of an OMO purchase could trigger a correction in the market, pushing the yield to above 7.52 per cent in the short term,” India Ratings wrote in a report. The 10-year bond yield closed at 7.47 per cent on Monday.

FCNR(B) maturity: Even as the central bank has already guided on how it plans to tackle the liquidity deficit that might arise once the $26-billion Foreign Currency Non-Resident (Bank), or FCNR(B), deposits come up for maturity in September, the market is still not sure how the math works. “A fresh rupee liquidity shortage may emerge from September-November on foreign-currency non-resident (FCNR) deposits redemptions of $26 billion (Rs 1.7 lakh crore). Any RBI guidance on how it plans to manage this will likely ease market concern,” wrote Standard Chartered in a report.