RBI cuts key rate: Monsoon, growth outlook spook market

RBI lowers growth estimate to 7.6%, says inflation may rise to 6% by Jan ’16.

By: ENS Economic Bureau | Mumbai | Updated: June 3, 2015 7:13 am
Reserve Bank of India, RBI rate, rbi cut rate, rbi rate cut, Sensex, BSE Sensex, Indian stock exchange, Sensex crash, RBI, Monsoon forecast in India, Sensex news, Sensex latest news, Business news RBI Governor Raghuram Rajan at a press conference in Mumbai on Tuesday. (Source: PTI Photo)

The Reserve Bank of India cut its key policy rate by 25 basis points on Tuesday, much in line with expectations, but lowered its growth estimate for this fiscal to 7.6 per cent while flagging the risks of a below-par monsoon and higher inflation by early next year — an outlook that spooked the markets.

Also Read: IMD forecast: 66 per cent chance of ‘deficient’ rain

Today’s rate cut by RBI — the third this year, making it a lowering of the repo rate by 75 basis points over the last six months — comes in the backdrop of what the central bank reckons as muted demand, including for loans, spare capacity in factories, weak corporate earnings and other growth indicators.

Also Read: Growth forecast for FY16 cut with a downward bias

RBI’s assessment of the economic recovery appears to be far more conservative than that of the government’s Central Statistics Office (CSO), prompting it to lower its growth estimate for 2015-16 fiscal from 7.8 per cent to 7.6 per cent. More worryingly, the central bank has indicated that retail or consumer price inflation could rise to 6 per cent by January 2016.

Share This Article
Share
Related Article

The risks of a below-normal monsoon this time, firmer crude prices, tepid global growth and external volatility could mean a pause or a stop to the cycle of interest rate cuts over the next few months.

RBI Governor Raghuram Rajan called it a “Goldilocks policy” — neither aggressive nor conservative — the best in the current scenario. “The RBI is not a cheerleader. Our job is to give people confidence in the value of the rupee, in the prospects of inflation, and having established that confidence, create a longer-term framework for good decisions to be made,” he said.

Rajan told banks to pass on the benefits to borrowers. By evening, State Bank of India, Allahabad Bank, Dena Bank and Punjab & Sind Bank had announced rate cuts. Others appeared to be waiting, with indications that some could cut rates over the next few days.

With private investment yet to pick up, that should be of concern to both the RBI and the government. Loan growth in the past year was at a near two-decadal low at below 10 per cent, reflecting the slowdown.

Rajan said the RBI’s strategy is “to front-load a rate cut today and then wait for data that clarify uncertainty”. Stock markets witnessed heavy selling, leading to a 660-point fall in the Sensex to 27,188.38 as the RBI put out a cautious guidance on future rate cuts and inflation movement.

The RBI policy statement said “a conservative strategy would be to wait, especially for more certainty on both the monsoon out-turn as well as the effects of government responses if it turns out to be weak.”

Former RBI Governor C Rangarajan said today’s policy action was sensible, but felt the RBI should have signalled that it would ensure more liquidity for policy impact.

SBI chief Arundhati Bhattacharya said the rate cut would transmit through the banking system soon. With the RBI projecting higher inflation and the monsoon forecast going awry, she said the government should push for more spending on infrastructure to support growth in the near term.

The rate cut is a welcome step considering the need to further improve domestic demand and revive credit growth. “The policy stand is in alignment with the current economic condition and the issues that require structural policy changes,” said ICICI Bank MD & CEO Chanda Kochhar.

According to the RBI, of the risks to inflation identified in April, three factors still cloud the picture. First, some forecasters, notably the weather office, predict a below-normal southwest monsoon. This means astute food management is needed to mitigate possible inflationary effects. Second, crude prices have been firming amid considerable volatility, and geo-political risks are ever present. Third, volatility in the external environment could impact inflation, it said.

Rajan said strong food policy and management would be important to help keep inflation and inflationary expectations contained over the near term. The RBI also pitched for a targeted infusion of bank capital into state-owned banks, especially those that implement concerted strategies to clean up stressed assets.

The RBI did not cut rates on April 7, citing lack of transmission from repo rate cut to bank lending rate cuts in the first quarter of 2015 — 25 bps each on January 15 and March 4. It made it clear that banks would need to first cut their lending rates in response to the previous policy rate easing, and only then further policy rate cuts would be entertained.

The push from RBI and the eventual improvement in the money market liquidity position led some of the key banks to cut lending rates by 13-25 bps in April, thus satisfying one of the pre-conditions set by RBI for easing rates further.

 

Video of the day

For all the latest Business News, download Indian Express App

    Live Cricket Scores & Results