After two wasted rate
cuts, should the RBI go for yet another?
Rajan
has already surprised the market twice with out of turn rate cuts on January 14
and March 4. In the intervening schedule policy on February 3 he refused a cut
on the grounds that the rate cut had happened just 20 days before on January
14. Consequently this time don't expect a rate cut. After all Governor Rajan
gave one just a month ago on March 4. The markets have bounced back from the bottoms and the rate
cuts have not percolated down to the economy. Reductions in key interest rate
by the RBI have not helped stimulate investment in the manufacturing sector, a
poll ahead of the Reserve Bank's policy review on Tuesday. RBI has lowered
interest rates by a total of 0.50 per cent since January, but banks are yet to
pass on the benefits to borrowers. "Interest rates or cost of finance
continues to be sticky. Interest rates paid by the manufacturers range from 9.5
per cent to 14.75 per cent with average interest rate at 12.2 per cent. Banks
will wait till RBI's next monetary policy review on April 7 before deciding on
interest rates. It is the last weekend before the credit policy. Traditionally
this is the most important policy – considering this is the first in the new
financial year. The markets and the economy will not only watch for the rate
action but also for RBI's assessment of the New Year, its growth and inflation
forecasts. So all eyes would be on the RBI and the likely steps it may take to
further boost the liquidity, However in case there is no action tomorrow, the
markets can sell off a bit more. This being the first policy of the year, the market is also
watching for RBI’s growth forecasts. This is a tricky issue for RBI after the
CSO while revising the base year from 2004 to 2011 revised the FY16 growth
forecasts to 7.5 percent from much lower levels earlier. We Expect RBI to
forecast a 7.6-8 percent gross domestic product (GDP) forecast this year i.e.
FY16. Most of us are expecting a gradual growth recovery, so given that
output gap is going to gradually start to close in the next two years what is
the base line assessment on inflation. Second, in a sense the March cut sort of
already implies this, but some more clarity on what the RBI really thinks about
the new gross domestic product (GDP) numbers, Perhaps potential growth is a bit
higher because we have seen lower inflation despite supposed upward revisions
in growth numbers, so their assessment on where we are on growth and more also
on potential growth on the economy.