On Tuesday, when the Reserve Bank of India (RBI) reviews the monetary policy, few in the financial markets expect Governor, Raghuram Rajan to cut rates. Although loan offtake has shrunk 3.16 per cent in April-June and stalled projects are yet to see a revival, analysts expect the central bank to wait for more clarity on food prices and cues on a possible US Fed rate hike. After a cumulative 75 basis points rate cut since January 2015, borrowers haven’t seen an equivalent cut in lending rates by banks which passed on just 25-30 bps in terms of lower rates to their customers. [related-post] Many borrowers, especially home loan customers, are upset that banks which consistently raised rates in the tightening cycle are not showing the same zeal in lowering interest rates when it is headed southwards. Lenders, especially state owned banks, are cautious when it comes to lending as most of them are trying to recover bad loans while coping with a slump in profits. The RBI has been relying on data while reviewing the policy. Looking ahead, economists feel base effects will keep CPI inflation below 5 per cent in July and August readings, but inch up towards 6 per cent by FY16 end. Mindful of the risks ahead, they expect the RBI to keep rates on hold until end-2015. “Any deterioration in external risks will see the RBI exercise more caution. We expect the benchmark Repo rate to be held unchanged at 7.25 per cent,” said Radhika Rao, economist, group research, DBS Bank. India Inc has been arguing that lower interest rates are essential to push investments and revive stalled projects worth around Rs 18 lakh crore. Many segments of the economy are waiting for a deeper cut. “It is something that would gladden the hearts of all connected with real estate. My heart says the RBI Governor should do so, but my mind doesn’t share the enthusiasm. If the RBI cuts rates, logically it should boost investments and growth,” said Niranjan Hiranandani, MD, Hiranandani Constructions. That said, several conditions listed by the RBI for a rate cut have been met. The only major hurdle is potential upside risks from an uncertain food price outlook. Higher cereal, vegetable and rice prices appear to be a dampener in the effort to cut rates. “Concerns related to key inflation risks highlighted by the RBI during its June 2015 policy review have ebbed in recent weeks, with the smaller than feared monsoon deficit, moderation in crude oil prices and relatively stable currency,” said Naresh Takkar, group CEO and MD, ICRA. Top investment banks such as Bank of America Merrill Lynch expect the RBI governor to pause on rates on Tuesday to await further clarity on the monsoon and allow the expected September 17 US Fed hike to play out. At the same time, Rajan will likely strike a dovish note to reiterate that the door is open for further rate cuts to support growth. Crucial factors 1) Although loan offtake has shrunk 3.16% in April-June and stalled projects are yet to see a revival, analysts expect RBI to wait for more clarity on food prices and cues on a possible US Fed rate hike 2) Economists say base effects will keep CPI inflation below 5% in July and August readings, but inch up towards 6% by FY16 end 3) Higher cereal, vegetable and rice prices appear to be a dampener in the effort to cut rates
