There is no surprise in the Reserve Bank of India’s (RBI) third bi-monthly policy statement on Tuesday.
As expected by a wide segment of the market, the policy rate remains unchanged at 7.25% even as the Indian central bank reiterated its accommodative monetary policy stance, something that was missing in the June policy review.
However, this should not give one the impression that RBI will cut its policy rate sooner than later. The policy document clearly says that the short-term real risk-free rates are supportive of borrowing “by interest rate sensitive consumer segments such as housing and automobiles”. This means rates at which home buyers and car buyers are getting bank loans are pretty okay at this point.
Since June, two critical developments have taken place which have a bearing on RBI’s outlook on inflation even though the non-food, non-fuel, so-called core inflation has been creeping up and the near-term inflation expectations of households have returned to double digits after six months. They are declining crude prices and a “near-normal monsoon thus far”. This has prompted RBI to bring down its average inflation projections for January-March 2016 by 0.2%; the risks for achieving the 6% target in January now is “broadly balanced”. This is a positive sign, as in the June policy, the risks were on the upside.
Clearly, RBI seems to be more confident about achieving the fiscal year-end inflation target even though it is aware of the fact that inflation will start rising from September when the so-called base effects wear off.
While soft crude prices seem to be a reality over the next few quarters, the factors that will influence the Indian central bank to go for the next rate cut are the trajectory of monsoon, US Federal Reserve’s call on interest rate and monetary transmission in India. Since January, RBI has cut its policy rate by 75 basis points—from 8% to 7.25%—in three stages, but banks have roughly cut their loan rates by 30 basis points. One basis point is one-hundredth of a percentage point.
On 29 September, when RBI announces its next bi-monthly policy statement, clarity will emerge on the monsoon front and probably the US interest rate scenario as well. Since RBI governor Raghuram Rajan has spoken about 150-200 basis points real interest rate, unless he is convinced that inflation will come down below 6% by the fiscal year-end, the scope for further policy rate cut is slim at this point.
On the positive side, RBI is convinced that the outlook for growth in Asia’s third largest economy is improving even though economic recovery remains a work in progress. It has left the growth estimate unchanged at 7.6% after marking it down from 7.8% in June.
It is happy with the government’s proactive role in containing food prices by supply management and modest rise in minimum support prices and does not seem to be perturbed over low credit growth as oil marketing companies are borrowing less because of drop in crude prices and corporate borrowing from the short-term commercial market is on upswing. There are hints that the central bank will allow the easy liquidity conditions to continue. This will encourage public sector banks, bolstered by the proposed capital infusion, to lend.
Overall, the macroeconomic outlook is certainly better in August than what it was in June but a cautious RBI is likely to remain in the pause mode for months to come.
Tamal Bandyopadhyay, consulting editor of Mint, is advisor to Bandhan Financial Services Pvt. Ltd, India’s newest bank in the making. He is also the author of Sahara: The Untold Story and A Bank for the Buck. Email your comments to firstname.lastname@example.org.
His Twitter handle is @tamalbandyo