RBI Rate Cuts

It looks unlikely, at least, till June this year…

A day after the inflation data and the US Fed announcement, the big question reverted back to the RBI stance. The primary question was once again the same; will the RBI cut repo rates in its April 2017 monetary review. Here are 4 reasons why the RBI will not…

Remember the MPC minutes… 

The Feb MPC minutes were quite revealing in that the committee had recommended shift in the monetary policy stance from “Accommodative” to “Neutral”. As the RBI governor put it, it leaves the option open to the RBI to move the rates either way. It indicates that the era of consistent downward trending rates is over in India. Markets need to be mentally prepared for that. A rate cut in April 2017 is almost as good as ruled out, at least as of now!

Fed has hiked rates… 

The Fed decision to hike rates by 25 basis points was largely expected. But the RBI will be watching out for the trajectory more closely. The Fed has hinted at 2 rate hikes of 25 bps each, which will take the Fed Funds rate to 1.50%. That is what even the Fed Fund Futures are implying. However, these conditions could change quite fast. If inflation picks up or growth spurts, then the Fed may increase the pace. In that event, the RBI would not want to be in a situation wherein it is left with little rate differential to stem FPI outflows.

Inflation is creeping up…

That could be the bigger worry for the RBI when it comes to rate action. The CPI inflation has crept up to 3.65% while the WPI inflation has crept up to 6.55%. Non-core inflation continues to be sticky and the food inflation has also showed signs of picking up. With the El Nino effect likely to afflict the weather in South East Asia this year, we may have a sub-par monsoon and a weaker Kharif output. Under these circumstances, the food inflation could put persistent pressure on overall inflation. The WPI has shown some real pressure coming from higher fuel prices and stronger price of minerals and ores. If inflation consistently goes up, then the RBI will have little room to cut rates. An element of clarity will emerge only after the first official meteorological estimates come out. The RBI may choose to play it safe, at least, till that time.

What does rate stance look like?

While April rate cut is almost ruled out by the RBI, even June rate cut is highly doubtful. Post June, it will depend on the inflation and monsoon data as well as how the Fed stance pans out. The bigger takeaway for the financial markets is that Emerging markets including India may be close to a bottom on rates. That leaves the rate action open on both sides. The focus will be on growth with inflation, rather than no-growth with no-inflation! ©

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