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RBI monetary policy: Market, bankers bet on 25 bps cut in repo rate

If there’s a tie on any decision, Governor, Urjit Patel will have the casting vote.

By: ENS Economic Bureau | Mumbai |
December 5, 2016 2:33:32 am
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With the government and the Reserve Bank of India agreeing to a Rs 6 lakh crore Market Stabilisation Scheme, market and bankers are now taking a 25 basis points reduction in the its key policy rate — the repo rate by the RBI for granted on Wednesday when the central bank is set to announce its bi-monthly monetary policy.

Markets appear to be reassured that MSS bonds will be used to suck out extra liquidity fuelled by the surge in deposits after the scrapping of high-value notes on November 8, thus allowing the RBI to ease the 100 per cent cash reserve ratio (CRR) on such deposits soon. Earlier, the government had issued these bonds to absorb the liquidity arising out of huge capital inflows.

Amid the cash shortage and long queues before the ATMs and bank branches, the six-member Monetary Policy Committee (MPC) will start its two-day meeting on Tuesday. If there’s a tie on any decision, Governor, Urjit Patel will have the casting vote.

Watch what else is making news:

“We were already expecting a rate cut in December on the back of moderating food prices. Growth concerns over the mix in pre-demonetization GDP growth prints, an output gap which will be negative for longer following demonetization, and lower inflation until then, make us believe that some more space for easing will open up. We add an additional 25 bps rate cut for the February meeting,” said Pranjul Bhandari, Chief India Economist, HSBC.

“In the light of the near-term growth slowdown and evidence of lower perishable food prices, we are bringing forward our rate cut call. We now expect the RBI to deliver a 25 bps repo rate cut to 6 per cent on December 7 instead of our earlier call of a February cut,” said a Nomura report.

According to Rana Kapoor, MD, Yes Bank, going forward, the liquidity fine tuning exercise is likely to be complemented by a reduction in the repo rate by 25 bps in the upcoming monetary policy review in December. “With inflation firmly under control, this will drive cost of liquidity lower and help in supporting growth momentum,” he said.

Bankers said the CRR hike is an ad hoc step and should be viewed as a temporary response that will start reversing once the deposit mobilisation by banks reaches a state of steady equilibrium. Despite the CRR hike, the systemic liquidity will still be in a comfortable surplus of over Rs 1.5 lakh crore. “This will boost RBI’s policy stance of keeping the overnight money market rates close to the policy repo rate,” Kapoor said.

Karthik Srinivasan , senior vice president, ICRA, said: “The hike in the ceiling for the MSS to Rs 6 lakh crore will supplement the excess inter-bank liquidity that can be absorbed by the RBI through overnight/term reverse repos by offering its stock of government securities in excess of Rs 7 lakh crore as collateral.” This in conjunction with the withdrawal of new currency in excess of Rs 2.5 trillion, suggests that the RBI may no longer need the temporary CRR hike to absorb excess liquidity. “Therefore, we expect the temporary CRR hike to be reversed with effect from the next reporting Friday,” he said.

Overall, GDP data suggest that the economy experienced robust aggregate momentum before the demonetisation shock hit. However, even then, the recovery was narrow based with consumption the only growth engine, investment still weak and non-agriculture sectors showing signs of slowing. “We expect the cash shortage triggered by demonetisation to last until January and the slowdown to be sharp in Q4, but to spill over into Q1 2017 as well,” Nomura said.

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