RBI May Take a Call on Rate Cut After Budget; Focus on Liquidity Absorption

Published: 29th January 2015 05:59 AM  |   Last Updated: 29th January 2015 05:59 AM   |  A+A-

MUMBAI: Will the RBI lower repo rate in its monetary policy review next week? The RBI cut repo rate by 25 bps points to 7.75% on January 15 following deceleration in inflation rates, especially consumer price index to its trajectory. Another factor was government’s commitment to meet fiscal deficit target of 4.1% for the year to March 31, 2015.

On its February 3 review, RBI is more likely to focus on how close the government is to delivering its promises on fiscal deficit and improving supply side before considering another rate cut. High on its radar is also likely to be implications of global liquidity on rupee and exports.

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“The RBI is more likely to watch out how PSU disinvestment plays out, as also the coal and telecom spectrum auctions, which are key to the government being able to meet fiscal deficit target for the fiscal,’’ said Krishnamoorthy Harihar, treasurer at First Rand Bank .

“RBI may provide a dovish tone while leaving the repo rate unchanged.’’ Bankers say the global crude oil prices have not changed over the past fortnight, nor has inflation or any other international factor. The US Federal Reserve Open Market Committee will on January 29 share its outlook for 2015. Global markets and governments are looking for clues on when the US could begin raising rates.

So far there is little external threat with global markets awash with liquidity. The European Central Bank (ECB) will be pumping in $60 billion each month to prop-up economies and as some liquidity finds its way into Indian stocks and equities, the rupee could tend to appreciate. The headache for RBI, for a change, will be how to prevent the rupee from strengthening.

“Liquidity management will become critical and RBI may bring in liquidity absorption measures,’’ said Shubhada Rao, chief economist at Yes Bank. “RBI could cut SLR (statutory liquidity ratio) by 50 basis points in tandem with LCR (liquidity coverage ratio) regime.’’

Rao estimates 50 basis points repo rate cut in 2015 and next cut after the budget. Also limiting RBI’s options of cutting rates in the second half is likelihood of the US beginning its rate increase cycle anytime after June.

“Rajan will wait until after the budget for another 25 basis points repo rate cut,’’ said Indranil Pan, chief economist Kotak Mahindra Bank Ltd. “Most parameters for the moment seem to be in line with his expectations. He will keep communication simple for the market. Anyway, he is walking the talk.’’

Most bankers expect RBI to lower repo rate by 50-75 basis points by December 2015. Future rate cuts by RBI should help borrowers even as all major banks have left their Base Rates unchanged after January 15 rate cut.

Yet, companies can get inexpensive capital from domestic corporate bonds as also overseas borrowings. So, while cheaper bank lending rate could take a bit longer, money could still get cheaper for large borrowers.

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