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RBI's Monetary Policy: It's More Than Just Interest Rates This Time...
Thu, 6 Apr Pre-Open

The Reserve Bank of India (RBI) will announce its decision today. It will either cut interest rates or keep them unchanged. The consensus is that it will keep the interest rates unchanged. Whether it goes that way will be known soon.

However, more than a move on the interest rate, market participants are looking forward for cues that the RBI's statement is going to deliver.

This is because there are many issues which, in the present scenario, demand RBI's attention. The problem of rising inflation, banks' bad loan woes, excess liquidity, rising rupee, the global economic set-up, etc.

Let us have a brief look at some of these issues.

Starting with inflation, the cost of living in India has risen by the day in recent months. The wholesale price index (WPI) rose an annual 6.55% in February, its highest in more than three years. The issue of rising inflation has dimmed the prospects of an interest rate cut by the RBI. However, market participants will look forward to RBI's commentary on inflation. This is because many factors - the GST, monsoon, re-monetisation, etc. - are about to have an impact on the inflation trajectory in the coming months.

Moving on to the issue of bad loans in banks... Bad loans, especially that of PSU banks, have risen at an alarming rate over the past one year. To tackle this issue, the RBI announced tough measures to be taken against willful defaulters. Also, the government announced to set up a mechanism for faster resolution of stressed assets in public sector banks. So any cues from the RBI in this regard will be watched closely by market participants.

Apart from that, stock markets will also look for commentary on how RBI intends to suck excess liquidity out of the banking system. This is because credit growth is hovering at its historic lows. And banks are flush with cash post notebandi.

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Lastly, market participants will also keep an eye on cues from the RBI regarding the overvaluation of the rupee and increasing global economic volatility.

What measures the RBI will take regarding these issues remains to be seen.

Regarding the RBI's decision on interest rates, it's hard to predict what the RBI will do and how the markets will react to it.

This is because there are a whole host of other global and domestic factors that the RBI will consider before casting its decision on interest rate today.

And the best thing to do in such a scenario could be to avert your eyes from this drama and keep them focused on the value and comfort of the safest stocks.

After all, rate cut alone will not speed up the economic slowdown caused by notebandi-led cash shortage, and consumption reduction. To set the paralyzed demand into motion, a lot many things needs to be done on the ground.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Jul 21, 2017 (Close)

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