Rate cut may be deferred

Reserve Bank of India may wait for government steps to correct fiscal situation

Lack of government action to address the country’s fiscal woes might prolong the wait for rate cuts from the Reserve Bank of India (RBI), economists say.

RBI has not changed the policy rate since the annual monetary and credit policy announced in April, owing to sticky inflation and hopes the government would act to support the central bank’s efforts. Currently, the repo rate, or the rate at which banks borrow from RBI, is eight per cent.

“If the government takes some steps on the fiscal consolidation front, RBI may be prepared to take a re-look at its stance in October,” said

A Prasanna, chief economist at ICICI Securities Primary Dealership.

 

RBI is scheduled to announce the mid-quarter monetary policy review on Monday and the Street expects status quo on the policy rate. The central bank would announce the half-yearly monetary policy review on October 31.

Siddhartha Sanyal, chief India economist, Barclays Capital, said, “Adjustments in fuel prices or softening in inflation can enhance the possibility of a rate cut. An adjustment in fuel prices, if any, would be seen as a step towards better fiscal consolidation.”

After the central bank’s policy review in July, RBI Governor D Subbarao had said the decision to cut the repo rate by 50 basis points in April was not a hasty one. He added it was necessary to front-load the rate cut and RBI’s decision had entailed hopes of government action, which failed to materialise.

A few economists, however, have an explanation for the lack of government action on the fiscal front. “Fiscal consolidation isn’t happening because from the income side, there are certain things that are beyond the control of the government. For instance, tax revenue,” said Madan Sabnavis, chief economist, CARE Ratings. He added the corporate sector wasn’t faring well and because of this, corporate tax collections would not increase.

If industrial production was stagnating, excise duty collections wouldn’t increase. And, imports might not grow, due to which customs collection would not rise . Also, in terms of disinvestment, market conditions did not seem favourable, Sabnavis said.

He added the government faced hurdles in non-development expenditure, particularly for subsidies. The only factor the government could control, he said, was development expenditure. However, this, too, was unlikely, he added.

But economists agree there are more rate cuts in store in the current financial year. “As far as rate cuts by RBI are concerned, the earliest could be January. We expect another 50-basis point rate cut in the current financial year,” said Prasanna. Sanyal expects further rate cuts to be 100-basis point ones. He adds rates may be cut before January.

The Street doesn’t expect a cut in the cash reserve ratio(the proportion of a bank’s total deposits it has to keep with RBI as cash; currently, it is 4.75 per cent). “We do not expect a CRR cut because a fair amount of government spending has helped keep the liquidity situation fairly comfortable,” said Shubhada Rao, chief economist, YES Bank. Dhananjay Sinha, economist & strategist with Emkay Global Financial Services, said borrowings by banks under the daily liquidity adjustment facility (LAF) was in the central bank’s comfort zone. Therefore, a CRR cut next week was ruled out. Today, banks borrowed Rs 51,385 crore under the daily LAF window.