Market verdict: Rajan to hold interest rate

Market players see no change in cash reserve ratio either, expect RBI to wait for Fed move

Bankers, economists and market participants expect the Reserve Bank of India to maintain status quo in its fifth bi-monthly policy review for 2015-16, scheduled on December 1.

All 12 participants in a BS poll said RBI Governor Raghuram Rajan would be in no mood to tinker with the interest rate or even the cash reserve ratio.

He would ideally wait to see the impact of a possible rate hike by the US Federal Reserve on December 15-16, possibly the first by the world’s largest economy since June 2006.

RBI has, since January, cut its policy rate four times to bring it down from eight per cent to 6.75 per cent.

In the fourth monetary policy review on September 29, the central bank surprised the market by a 50 basis point cut.

One bps is a hundredth of a percentage point.

The repo is the rate at which the RBI lends to banks.

In his monetary policy statement, Rajan said the central bank’s stance would continue to be accommodative but the focus of monetary action for the near term would “shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 bps cut in the policy rate are removed”.

RBI, he said, would continue to be vigilant to keep the economy on its target disinflationary path.

RBI’s target of six per cent retail inflation by January 2016 is achievable although prices of food, especially of pulses, remain elevated.

Prices of pulses pushed consumer price index-based inflation to a four-month high of five per cent in October and Rajan recently cautioned the challenge was to avoid a wage-price spiral.

“We are not really targeting that first round effect on food; we are worried about the second round effect on wages and are trying to make sure that is contained. Unfortunately, that sometimes means slower activity,” Rajan said on November 20, at an event in Hong Kong.

Banks, too, have not done their bit in passing on interest rate cuts, and further rate cuts by the central bank are unlikely to help lower the borrowing cost in the economy.

“Purely from a food inflation perspective, it is quite worrisome.

"Kharif sowing is flat and the prospect for rabi crops is also not rosy after three consecutive negative crop cycles,” said Rupa Rege-Nitsure, chief economist at L&T Financial Services.

Inflationary expectations continue to remain high, tying the hands of the RBI.

“There has been moderate transmission of past easing and uncertainty related to the inflation outlook for 2016.

"The impending rate hike by the US Federal Reserve further reduces the possibility of monetary easing by the RBI.

"There may not be any further rate cut in the current financial year,” said Aditi Nayar, senior economist at rating agency ICRA.

The relief comes from a moderate price outlook for commodities, particularly oil.

But factors like the Seventh Pay Commission and even the slowdown in China are concerns for the RBI.

“China is emerging as a big factor.

"The RBI will watch how the rebalancing takes place in China before taking a call on rates here,” said Gaurav Kapur, India economist at the Royal Bank of Scotland.

In an interview with Hong Kong-based South China Morning Post, Rajan said the slowdown in China was affecting global economies, including India.

“India, being a commodity importer, has been helped a bit by cheaper commodities.

"So the impact has not been as bad as it could have been. Still, on the whole, we have been adversely affected by the Chinese slowdown because China’s slowdown has impacted global growth and India is very well integrated with the global economy,” Rajan said in the interview.

Most poll participants said the central bank had room to accommodate another 50 basis point rate cut.

But that may not happen in this financial year as the central bank will watch how the markets react after the Fed rate hike and how the central government implements the pay panel recommendations without widening its fiscal deficit.

Aditya Puri, managing director, HDFC Bank said in an event on Tuesday (not part of BS poll) that policy rates are headed south, given low inflation and falling commodity prices.

“It is difficult to say whether it will be in this policy or the next, but we could see further reduction,” Puri said.

12 institutions -- including State Bank of India, IDBI Bank, Royal Bank of Scotland, Canara Bank, Deutsche Bank, Birla Sun Life, L&T Financial Services, Axis Bank, Bank of America-Merrill Lynch, IndiaFirst Life Insurance, ICRA Ltd, Max Life Insurance -- participated in the poll.

Image: RBI Governor Raghuram Rajan. Photograph: Reuters