RBI To Hold Its Guns At Review Meet

It’s going to be a damp squib of a monetary policy review tomorrow (1 December) at Mint Road. The two key factors to watch out for here are inflation, and a rate hike by Fed – and how the Reserve Bank of India (RBI) reads the tea leaves.

While WPI inflation consecutively declined for the twelfth month in a row to 3.8 per cent (October 15), inflation in food grains registered a significant growth of 9.2 per cent (3.3 per cent) on elevated level of inflation in pulses. CPI inflation is now at 5 per cent (4.41 per cent in October 14).

“We see little headroom to cut rates after this, although we led the Street in calling for RBI rate cuts last year. If we use medium-term about-7 per cent CPI inflation as a proxy for inflation expectations, policy rates, at 6.75 per cent are already negative ex ante (which is surely how real policy rates ought to be measured)”, points out Indranil Sen Gupta India-Economist at Bank of America-Merrill Lynch (India).

Fears of a rate hike by the Fed and dull quarterly numbers have spooked foreign investors who have pulled out more than $1.5 billion -- net outflows in equities stood at Rs 6,616 crore in November; it was Rs 3,207 crore from the debt side or a Rs 9,823 crore ($1.5 billion) all told.

What’s will also be of interest is how Mint Road views the poor transmission of past rate cuts. In its September review, Mint Road had obliged with a repo rate cut of 50 basis points (bps) to 6.75 per cent -- a four-and-half-year low. It left the cash reserve ratio or CRR (the proportion of deposits banks’ park with Mint Road) and the statutory liquidity ratio or SLR (the proportion of deposits to be invested in government securities) unchanged at four per cent and 21.5 per cent respectively.

The repo rate cut was a front-loaded one, and as Dr Raghuram Rajan noted: “While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the Government to ensure that impediments to banks passing on the bulk of the cumulative 125 bps points cut in the policy rate are removed”.

“The September policy statement refrained from giving any detailed preconditions for further monetary policy accommodation. So, the first thing we will watch out for is whether the RBI sets the stage for further easing by stating a list of preconditions which could guide the markets better”, says , Samiran Chakraborty, chief economist at Citigroup (India).

He adds: “Unfortunately, the progress on monetary policy transmission has been rather uneven. It will be interesting to see whether the RBI lays out a more detailed plan of improving the transmission process in the policy statement as it awaits the impact of the shift in base rate methodology (likely from 1 April 2016) – from average cost of funds to marginal cost of funds”, says Chakraborty.