Monetary Policy: In no hurry to cut rates! - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Monetary Policy: In no hurry to cut rates!

Jun 3, 2014

In-line with the new government's thrust to revive economic growth; the Reserve Bank of India Governor Raghuram Rajan left the key benchmark lending rates unchanged in its second bi-monthly monetary policy FY15 review today.

Policy stance

The Reserve Bank of India (RBI) has maintained a status-quo on key lending rates. The repo rate or the rate at which the Central Bank lends money to commercial banks remains unchanged at 8.0%. Cash reserve ratio or CRR is also kept unchanged at 4.0%. However, the key highlight of the policy review has been the reduction in statutory liquidity ratio or SLR by 0.5% from 23% earlier to 22.5%.

While the food inflation has remained stubborn, the CPI inflation excluding food and fuel has been moving downwards. The CPI has come down this year post several tightening measures by the central bank. But the risks to retail inflation (currently around 8%) remain on account of El Nino effects, geopolitical tensions and the impact on fuel prices. That said, the risks to CPI inflation are largely expected to get offset by the stronger government action on food supply and better fiscal consolidation going forward.

Keeping in view the sluggishness in economic activity and the sticky inflation rate, it was imperative on the part of the central bank to hold the key policy rates. Moreover, the fragile credit scenario warranted more capital headroom for banks. The SLR reduction is expected to infuse Rs 200 bn liquidity into the system thus helping ease capital concerns for banks.

Economic scenario

While the growth is gaining traction in the West, the emerging markets have been bogged down by the structural constraints. Back home, the consumption and the investment demand continues to remain weak and consequently the poor credit growth persists.

The CPI in April had accelerated to 8.6% primarily driven by higher food prices. Moreover, India's industrial production (IIP) has shrunk for the second time in row by 0.5% on account of weak consumer demand and poor capital investments. Not just that, the GDP growth has slowed down to 4.7% in FY14 as against the estimate of 4.9%. This becomes the second consecutive year of sub-5% growth for the Indian economy. It is the worst slowdown in the decade.

The way forward....

While the RBI has done its bit to boost the credit off-take and address inflationary pressures, the ball in now in the government's court. Reducing supply side pressures by trimming subsidies is obligatory for the government to yield the desired results.

The central bank aims to bring down the inflationary levels to 8% by January 2015 and 6% by January 2016. However it would be too premature to estimate the impact of reforms on RBI's policy stance since global cues and geo-political risks can also play a part.

Lower interest rate cycle...around the corner?

We believe, the RBI, given its conservative stance, is unlikely to be in a hurry to cut rates. Which in turn means that investors and corporate looking forward to the lower interest rate cycle will have to be patient. Until and unless the new government can reasonably assure the central bank of its actions to keep prices rise under control, the governor may not relent. And hence it will be too risky to speculate on whether we are on the cusp of reversal in interest rate cycle.


Equitymaster requests your view! Post a comment on "Monetary Policy: In no hurry to cut rates!". Click here!

  

More Views on News

INDUSIND BANK Share Price Up by 5%; BSE BANKEX Index Up 1.8% (Market Updates)

Sep 25, 2020 | Updated on Sep 25, 2020

INDUSIND BANK share price is trading up by 5% and its current market price is Rs 516. The BSE BANKEX is up by 1.8%. The top gainers in the BSE BANKEX Index is INDUSIND BANK (up 5.0%). The top losers is CITY UNION BANK (down 0.1%).

IDFC FIRST BANK Share Price Up by 5%; BSE BANKEX Index Up 1.5% (Market Updates)

Sep 25, 2020 | Updated on Sep 25, 2020

IDFC FIRST BANK share price is trading up by 5% and its current market price is Rs 28. The BSE BANKEX is up by 1.5%. The top gainers in the BSE BANKEX Index is IDFC FIRST BANK (up 5.4%). The top losers is CITY UNION BANK (down 0.6%).

How the YES Bank Collapse Unfolded - 10 Points (Sector Info)

Mar 9, 2020

A timeline of how YES Bank went from a stock market darling to a pariah.

Today's Stock Market Crash: 10 Points (Sector Info)

Mar 6, 2020

Top factors that dragged the markets lower today.

More Views on News

Most Popular

Pick the Best Multibagger Stocks in 2020

Every investor is looking for multibaggers stocks. Get free guidance for buying the best multibagger stocks online in india a...

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

My Top Stock to Buy in this Market Selloff (Profit Hunter)

Sep 22, 2020

The recent correction offers a great opportunity to buy this high conviction smallcap stock.

What Do the Charts Say About Buying Smallcaps Now? (Fast Profits Daily)

Sep 18, 2020

Everyone seems to be excited about buying smallcaps now...but is it the right thing to do? What do the charts tell us? Find out in this video...

How Much Money Do You Need to Be a Professional Trader? (Fast Profits Daily)

Sep 17, 2020

In this video I'll answer a question I get asked often: How much capital do I really need to trade the markets for a living? Let's find out...

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE BANKEX


Sep 25, 2020 03:36 PM

S&P BSE BANKEX 5-YR ANALYSIS

COMPARE COMPANY

MARKET STATS