RBI MAINTAINS STATUS QUO, DESPITE COMPELLING CASE FOR RATE REVISION; CUT LIKELY IN AUGUST

Financial Express, Updated: June 07, 2016

Reserve Bank of India Governor Raghuram Rajan has decided to adopt a cautious stance and maintain a status quo in its second bi-monthly policy review, despite a compelling case to cut interest rates amidst a favorable monsoon outlook, CPI inflation in line with RBI’s projected path, the Government’s progressive reforms, fiscal consolidation and the need to nurture growth;

After the 25 bps monetary easing along with the introduction of a phased transition towards a neutral liquidity framework in the month of April, the RBI has maintained a status quo this time amidst the emergence of some upside pressure on inflation.

While commodity prices, especially oil continue to remain somewhat benign, there has been a significant reversal in prices since February. As a result, the central bank has now introduced an upside bias to its retail inflation forecast, even though the forecast of 5% inflation by end of FY17 has been retained. In addition, the recent firming up of oil prices could also add some upside risk to inflation.

However, some inflationary forces will be offset by disinflationary forces, especially through food, in the coming months. While there is pressure on food prices currently, the same is expected to wither away with the anticipated favorable spread of monsoon. The Government’s announcement of moderate increase in MSPs along with various supply management measures should further help to keep a lid on food inflation.

I foresee RBI’s cautious stance giving way to accommodative actions in August, on the back of favorable monsoon outcomes and sustained acceleration of Government reforms.

It appears that the uncertainties on the global horizon with Fed policy overhang and UK Brexit vote tipped RBI’s decision in favor of a status quo. With its accommodative stance still in place, I now see high probability of a rate cut in August by at least 50 bps, with the interim period expected to provide clarity on progress of south-west monsoon and its impact on food prices; clarity on the US Fed’s stance on its monetary policy and the likelihood of the next rate hike and also the final decision on Brexit.

The central bank has acknowledged the gradual improvement in growth momentum, driven by consumption demand. It further expects momentum to gain traction in FY17 on the back of a normal monsoon, implementation of the 7th Central Pay Commission, and higher public outlays for capital expenditure (led by roads and railways). Hence, the projection for FY17 GVA growth was retained at 7.6% with risks evenly balanced.

Going forward, we believe India’s GDP is set to cross 8.1% in FY17 on the back of visible pickup in consumption demand like cement, oil, electricity along with stronger than anticipated Q4FY16 corporate earnings. A quicker Economic turnaround is thus getting supported by growth drivers getting broad based. These growth impulses will be catalyzed when RBI goes in for its next round of rate easing.

Borrowing a phrase from the IMF chief Christine Lagarde, we are fortunate to be at a juncture when India is indeed a ‘bright spot’ in the global economy, with unprecedented Confidence and Conviction in India’s economy.

I am confident that the Government will continue to drive growth by accelerating reforms and timely capital infusions into constrained public sector banks; while the subdued appetite for fresh investment will be offset by higher public sector capital expenditure and a sustained improvement in consumption demand. To complement this, the central bank too has significant scope to support growth through further monetary easing.

-By Rana Kapoor MD and CEO of Yes Bank 

Source – https://www.financialexpress.com/opinion/rbi-maintains-status-quo-despite-compelling-case-for-rate-revision-cut-likely-in-august/276492/

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