India Inc expects 50 basis point cut in RBI lending rate (Preview)

Dented by a general slowdown in consumer demand and a weak global growth outlook, India Inc expects to get a "booster dosage" of nearly 50 basis points worth of cut in key lending rates in the upcoming monetary policy review of the central bank.

"The trouble has been aggravated by a high level of debt in the private sector which makes it onerous for the companies to service the debt," said D.S. Rawat, secretary general, Associated Chambers of Commerce and Industry of India (Assocham).

"Rather, than a small cut, at least a 50 basis points reduction in repo (repurchase rate) with a clear message to the banks to pass on the same, should be pushed."

Assocham asserted that the RBI has remained focused on inflation, while the time has come to give a push to the industrial production, infrastructure and services sectors.

Inflation gauged through the consumer price index (CPI) was record at 3.66 percent in August, which was two percentage points lower than the RBI's January 2016 target.

In case of the wholesale price index (WPI), inflation plunged to a historic low of -4.95 percent in August. The continuing deflationary trend has curtailed the pricing powers of the manufacturers, said Assocham.

On the other hand, industrial production decreased to 0.4 percent in August after recording an increase of 0.9 percent in July.

An easing of key lending rates is expected to restore investors' confidence, prop up sales of interest in sensitive sectors like automobile, capital goods and real estate.

Furthermore, not just the industry, but equity and currency markets, would set their eyes on the fourth bi-monthly monetary policy review of the Reserve Bank of India (RBI) slated for September 29.

"The markets are eagerly awaiting the RBI policy, with the general consensus being 25 bps repo rate cut," Devendra Nevgi, chief executive of ZyFin Advisors, told IANS.

Even though the markets have already discounted a 25 basis points worth of cut by the RBI, the language used by the RBI governor in his assessment of the economy will be closely monitored to give further cues on the future of rate cuts.

"The language that RBI uses is very important, specifically on the CPI (consumer price index) trajectory, given the monsoon deficit and wearing-off of the base effect," Nevgi said.

Ratings firm India Ratings and Research (Ind-Ra) also pointed out that any affirmative announcement on the medium-term framework for foreign portfolio investment limits in debt securities might spell cheer.

"Crucially, investors' expectations of a further policy room for accommodation will be shaped by RBI's assessment and further guidance, if any," the Fitch Group Company said.

Industry is of the opinion that the upcoming review might be the last chance to cut rates this calendar year before inflation spirals up, also because the review comes just after the US Fed's decision not to hike its own rates due to global economic uncertainty. It is likely that the global financial markets may be in the grips of panic if and when the Fed finally raises key rates.

A sharp drop in the RBI's key rates and an increase in the Fed's interest rates can be catastrophic since this could result in sudden flight of capital.

"Even, the government has reportedly said that there is a favourable environment for monetary policy action by the central bank," said Shreyash Devalkar, fund manager, equities, BNP Paribas Mutual Fund.

"Banking stocks have witnessed some long build-up, whereas realty stocks have been seeing some buying action as well."

Not just equities, but even the Indian rupee is counting on a rate cut.

Market watchers said though a token reduction of only 25 basis points "won't do much" for the rupee, a "booster dosage" of nearly 50 basis points might do the trick in spurring both the equity and currency markets.

"All eyes will be on the RBI policy. Markets have already discounted a 25 bps rate-cut, whereas a 50 bps cut can be a surprise move which will have a positive impact on domestic equities leading to a recovery in the rupee," Hiren Sharma, senior vice president, currency advisory at Anand Rathi Financial Services, told IANS.

The rupee has continued on its downward trajectory. It fell for the fourth consecutive day against the US dollar on Thursday, down 17 paise at 66.16 to the dollar, against its previous close of 65.99.

"The EM (emerging markets) sentiment is weak and the EM currencies have further depreciated. This (rate cut) will drive the local sentiment," Nevgi added.