Rate cuts to status quo, market analysts divided on RBI MPC policy action

The arguments in favour of rate cuts are its expected support to the slowing economy, revival of investment and a push for consumption.

Analyst views on the Reserve Bank of India’s policy action at its forthcoming Monetary Policy Committee (MPC) meeting are divided. Though the scale is tilted towards a 25 basis points (0.25 per cent) rate cut to be announced at the June 6 meeting, the third cut in a row, there are some who believe RBI MPC will pause on rate action.

The arguments in favour of rate cuts are its expected support to the slowing economy, revival of investment and a push for consumption. Oil prices have cooled albeit temporarily till the demand-supply issues get clearer in the global market, and the domestic inflation may hold at least till the monsoon news is in, and the impact and if the monsoon is delayed or below par.

“This is the first time in 35 years that a government has returned to Delhi with a majority of its own. The BJP manifesto has itself committed to step up investment by reducing the cost of capital. Looking ahead, we expect the RBI MPC to cut 35 bps (up from 25 bps earlier),” said Indranil Sen Gupta of BofA Merrill Lynch in a report.

With a decisive mandate, the attention will shift to policy, both fiscal and monetary, said Shanti Ekambaram, president, Kotak Mahindra Bank. Her rate cut expectation ranges from 25-50 bps. “The central bank will see how the fiscal situation unfolds with the budget announcement and spending measures. It will also take into account global factors, trade tensions, crude price trends, geopolitical equations and the monsoon outlook,” she said.

The calls contrary to the rate cut hopes crop up from issues like banks not passing on the previous rate cuts to customers, uncertainty over inflation with fears of El Nino impacting monsoon, and threatening geo political situation when it comes to global trade and oil prices. The RBI may also evaluate the government’s policies before taking a rate cut decision, and the market is pricing in less than 50 per cent change of a cut in policy rate in June, said a Goldman Sachs report.

ICRA’s Financial Sector Ratings head Karthik Srinivasan also said that MPC will adopt a wait-and-watch approach and look for the fiscal policy announcements in the Union Budget to be presented in July.

‘Liquidity injection measures possible’

Though analyst views are divided, there is, however, a near unanimity that liquidity injection measures are possible with persistent liquidity issues, and NBFC sector still strapped for cash.