Rate cuts: RBI nudges banks
The Reserve Bank of India (RBI), in its fifth bi-monthly credit policy review on Tuesday has kept repo, reverse repo, cash reserve ratio (CRR) and bank rate unchanged.
“While oil prices, barring geopolitical shocks are expected to remain benign for a few quarters more, the uptick of CPI inflation excluding food and fuel for two months in succession warrants vigilance”, the RBI statement said.
RBI is set to bring down inflation to 6% by January next year and aims to further reduce it to 5% by March 2017.
But Rajan said further rate cuts would be dependent on inflation and external developments, while reiterating his call for banks to lower their lending rates to reflect the steep easing undertaken by the RBI this year.
The central bank indicated mild downside biases to its 2015-16 projections for economic growth (7.4 per cent) and the retail inflation trajectory (5.8 per cent by January 2016). Still, a reversal in commodity prices is beyond Rajan’s control and is a risk that would have to be managed by monetary policy.
“The strong growth data is driving the positive rupee sentiment”, said Navin Raghuvanshi, a Mumbai-based foreign-exchange trader at DCB Bank Ltd. “Investors will now wait for the central bank policy before any big moves”. The Government is examining linking small savings interest rates to market rates. According to Kalla, the high interest rate had led to an expensive and uncompetitive lending regime that suppressed growth.
There had been pressure for the RBI to cut the repo rate in the wake of a continuing slump in India’s manufacturing sector, which grew at its weakest pace in over two years in November as demand and output continued to soften.
On the one hand, the 7.4% GDP growth the country recorded in the fiscal second quarter makes it the fastest-growing large economy in the world.
India’s central bank left interest rates unchanged after four cuts this year to meet inflation targets that are starting to look more vulnerable.
A survey of 47 economists by Bloomberg had overwhelmingly predicted Rajan would hold rates after he surprised analysts in September with an aggressive 50-basis-point reduction, suggesting there would be little room for further easing in 2015.
He also announced that RBI will shortly finalise the methodology for base rate calculation as per the marginal cost of funds which will be mandatory for banks. He also hoped that the banks, facing huge bad debts, would be able to clean up their balance sheets by March 2017 with all the help being provided by the government and RBI. “Rural wage growth, as also corporate staff costs, remain subdued”, Rajan also said in his statement. Another event that markets would be keenly watching is US Federal Reserve’s decision on interest rates will also be keenly watched.