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Business News/ Money / Calculators/  Respite for borrowers unlikely this year
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Respite for borrowers unlikely this year

The central bank remains worried about inflation and has left the repo rate unchanged at 8%

Shyamal Banerjee/MintPremium
Shyamal Banerjee/Mint

Borrowers expecting some relief on their equated monthly instalment (EMI) outflows should prepare themselves for a long wait, as a cut in interest rates looks unlikely in the near term. The Reserve Bank of India (RBI), in its third bi-monthly review of the monetary policy, left the key policy rates unchanged. The central bank has left the repo rate—the rate at which commercial banks borrow from the central bank for short term—at 8%. However, RBI has reduced the statutory liquidity ratio (SLR) by 50 basis points (bps) to 22%. SLR is the proportion of net demand and time liabilities that banks are required to maintain in specified instruments. One basis point is one-hundredth of a percentage point. The stock market, which was expecting the review to be a non-event, ended the day with the S&P BSE Sensex gaining 0.72%.

Interestingly, in the June review, the central bank had noted: “If the economy stays on this course…if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance." The statement was read by many in the market as an indication of moving closer to a rate cut. Consumer price inflation for June coming under 8%—the level that RBI is targeting for January 2015—added hope.

However, the central bank has clarified that it is not only looking at the target of 8% by January 2015, but also aiming to bring inflation down to 6% by January 2016. “While inflation at around 8% in early 2015 seems likely…the balance of risks around the medium-term inflation path, and especially the target of 6% by January 2016, are still to the upside, warranting a heightened state of policy preparedness to contain these risks if they materialize," the central bank said in its statement.

Therefore, unless inflation surprises big time on the downside, a rate cut can easily be ruled out, at least in the current year.

Indranil Pan, chief economist, Kotak Mahindra Bank Ltd, agrees that the possibility of a rate cut is far off. “RBI is looking at 6% inflation as the medium-term target. If the demand picks up, there could be inflationary pressure in the interim before supply catches up," said Pan.

Market response

While the market was not expecting RBI to cut rates in the August policy, but will this long pause affect sentiment? “RBI is preparing grounds where India is least affected when the quantitative easing in the US comes to an end and rates move up," said Sujoy Das, head (fixed income), Religare Invesco Asset Management Co. Pvt. Ltd.

In the stock market, some of the rate sensitive sectoral indices, such as S&P BSE Bankex and Consumer Durables Index, have performed well in the recent past. However, now that it is becoming increasingly clear that markets will not get support from interest rates in the near term, is it likely that rate sensitive and cyclical stocks will lose attraction?

“Interest rate is not the sole determinant of the performance and I will not look at them (rate sensitive and cyclicals) negatively because of what happened in the policy review," said Ajay Bodke, head (investment strategy and advisory) Prabhudas Lilladher Pvt. Ltd.

“There are two sides to the policy statement—hawkish on inflation and dovish on growth," said Nilesh Shah, managing director and chief executive officer, Envision Capital. He further added it indicates that the growth has bottomed out. As growth picks up, it will be good for sectors such as consumer durables, auto and housing. So, maybe after some consolidation, demand will be back for stocks in these sectors.

Status quo

Analysts are of the view that there will be no change in EMI as well as the deposit rates. They do not see the SLR cut translating into any meaningful rate cuts by banks.

“Borrowers should not expect any change in base rate as of now," said Abhishek Kothari, research analyst-banking, financial services and insurance, Networth Stock Broking Ltd.

What does the policy mean for debt fund investors? The answer is again: no change in strategy. “The bond markets remained somewhat nervous post-release of the policy statement. The 8.4% 2024 G-sec (government security) yields rose 0.78%, perhaps sensing some hawkish tones. That said, rates are likely to remain in a range of 20-30 bps from the current 8.55%. For investors in debt funds, no change in their strategy towards their investments would be required at this juncture," said Vidya Bala, head-mutual funds research, FundsIndia.com. She added that it is noteworthy that yields of short-term and medium-term maturity instruments have already come off from a year ago. This has resulted in double-digit gains in quite a few short-term debt funds as well as income funds over a one-year period. A hold strategy would be ideal on these funds, if an investor’s requirement for funds is more than a year away.

Meanwhile, RBI stated that it will continue to carry forward with its banking sector reforms agenda. RBI also stated that it has “taken a number of steps to enhance efficiency, increase entry, speed up resolution and improve access to financial services, such as modified regulations on long-term lending and borrowing, proposals for licencing payment banks and small banks, a framework to deal with stressed assets, actions to further the use of mobile phones in banking, and efforts to simplify know your customer (KYC) norms, among others".

Mint Money take

The consensus view in the market before the policy was announced was that the central bank would not touch the policy rates in this review. However, the market was keen to know how RBI was reading the situation, as inflation had softened in recent months and the new central government, in its first budget, has committed to fiscal consolidation.

RBI on its part has made it clear that it is targeting 6% inflation by January 2016, which would effectively mean that a possibility of a rate cut, at least till the end of this year, can be easily ruled out.

Borrowers will have to wait longer for some respite and investors looking forward to interest rate cut as the next trigger for the market are likely to be disappointed.

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Published: 05 Aug 2014, 08:29 PM IST
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