RBI CREDIT POLICY - EXPECT NO MORE RATE CUTS THIS YEAR

By Ruma Dubey

“Expect no more rate cuts in this year as this 25 bps today itself is more like a preemptive step to ease supply constraints”.

That’s the message which has come across loud and clear from today’s Credit Policy. The market was down around 190 points just before the Policy was to be announced but the moment the announcement was made, the Sensex slipped over 300 points. More than the 25 bps rate cut, which was as per expectations, the market is perturbed by the hawkish stance of the RBI. The hike in inflation target and lowering of growth rates for FY16 does not bode too well.

This is probably the best move which RBI could have taken under the present circumstances. As the Governor himself said, this was a “Goldilocks” policy.  Banks have transmitted some of the rate cuts and with the current 25 bps lowering; the Governor hopes that this too is passed on to the consumers.

At the ensuing Press Conference the Governor stated that three factors currently remain uncertain, which could have a lasting impact in the growth and inflation in coming months. Firstly, the various monsoon forecasters, wherein IMD itself has predicted sub-par monsoon. This means that the Govt needs to get into astute food management to mitigate any crisis arising out of poor monsoon. Secondly, food inflation could be the collateral damage of poor monsoon. Also the new 14% service tax kicking in, demand is expected to get curtailed. Thirdly, volatility in the external environment. Based on these uncertainties, it is best to wait for surety to emerge and see how the Govt reacts and prepares for these.

The Governor once again placed a lot of onus on the Govt getting back to policy action, encouraging investment to alleviate medium term supply side bottlenecks. The Governor stated that between 2000 to 2003, monsoon was poor but thanks to proper action from the Govt, inflation remained largely on the leash. Thus the message coming across – RBI has done what it could, now it is time for the Govt to roll up its sleeves and get to work.

Highlights of the Credit Policy announcements:

• Reduced the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 7.5% to 7.25% with immediate effect

• Keep the cash reserve ratio (CRR) of scheduled banks unchanged at 4% of net demand and time liabilities (NDTL)

• Continue to provide liquidity under overnight repos at 0.25% of bank-wise NDTL at the LAF repo rate and liquidity under 14-day term repos as well as longer term repos of up to 0.75% of NDTL of the banking system through auctions

• Continue with overnight/term variable rate repos and reverse repos to smooth liquidity.

• Reverse repo rate under the LAF stands adjusted to 6.25% and the marginal standing facility (MSF) rate and the Bank Rate to 8.25%.

• A conservative strategy would have been to wait, especially for more certainty on both the monsoon outturn as well as the effects of government responses if it turns out to be weak. But given the weak investments and supply constraints expected to remain over medium term, RBI decided to front-load a rate cut today and then wait for data that clarify uncertainty. 

• It urged the banks to pass through the sequence of rate cuts into lending rates.

• Monetary easing can only create enabling conditions for fuller govt policy thrust to step up public investment

• Its projection for output growth for FY16 has been marked down from 7.8% in April to 7.6% with a downward bias to reflect the uncertainties surrounding these various risks.

• Inflation is expected to be pulled down by base effects till August but to start rising thereafter to about 6% by January 2016 – slightly higher than the projections in April of 5.8%.

• A targeted infusion of bank capital into scheduled public sector commercial banks, especially those that implement concerted strategies to clean up stressed assets, is also warranted so that adequate credit flows to the productive sectors as investment picks up.

• The third bi-monthly monetary policy statement will be announced on August 4, 2015.

• One more recipient of the banking license to be announced in August’15.

So what next for the markets now? The markets have turned despondent for now, down over 400 points, looking for the next big trigger. A policy action from the Govt could be only savior or else we are looking at a bleak picture ahead in the immediate short to medium term. Earnings for Q1FY16 and monsoon will remain predominant decisive factors.