EXPECTATIONS FROM RESERVE BANK OF INDIA

As the Reserve Bank of India gets ready to announce its fourth bi-monthly monetary policy review on September 30th, speculation about possible rate cut has been on the rise. The opinion of various financial experts seems to suggest a likelihood of the status quo on Tuesday even as the drop of wholesale inflation in its five year lows touching 3.74% has brought a ray of hope towards a possible rate cut in the announcement.

In its last policy statement issued in August by RBI governor Raghuram Rajan, the agency had kept key interest rates unchanged owing to the inflationary expectations and uncertain monsoon conditions. Since the RBI governor had clearly reiterated that the agency would not resort to rate cut till sustainable, low inflation would show impressions of staying for a medium to long term, chances of a rate cut remain quite low.

Low but is it low enough?  

The retail inflation based on the consumer price index (CPI) has declined from more than from 8.59% in April to 7.8% in August. Wholesale price index (WPI) inflation has also witnessed a steep decline, reaching 3.74% in August from 5.55% recorded at the beginning of the financial year. While inflation figures have been impressive for the month of August, the statement of RBI governor in the not too recent past about the need of breaking the back of inflation as a yardstick towards a rate cut gave a clear signal that any rate cut announcement is a distant dream. While the inflation has cooled off, it has certainly not reached a level where the macro and micro economic parameters can safely presume that inflation would not come back to haunt in the short term.

Are interest rates hurting the industry?

In the month when Prime Minister Narendra Modi initiated the “make in India” campaign and is aggressively seeking support of non resident Indians and global investors to enter the manufacturing sector in India, industry experts have called for a decrease in interest rates to facilitate growth. President of PHD Chamber Sharad Jaipuria speaking to reporters have also underlined the significance of a rate cut to put industrial growth back on track. With inflation figures supporting a case for interest rate cut, it remains to be seen whether the RBI governor would indeed bite the bullet or wait for a more sustained inflation drop before announcing a rate cut.

SLR rate cut likely: 

In the last monetary policy review in August, the Reserve Bank of India had left the REPO rates unchanged for a third consecutive time at 8%. Financial experts, including banks, are bracing themselves for a similar announcement as inflation may still need some cooling off period before rate cuts could be introduced. However, like the previous policy announcement, there is a high possibility that the bank’s mandatory investment in government bonds, technically known as the statutory liquidity ratio (SLR) is likely to be reduced by at least half a percentage point.  Statutory Liquidity Ratio is essentially the portion of deposits that banks are required to keep in government bonds. During the last announcement SLR was reduced to 22% from 22.5% brining in high liquidity to the tune of Rs 40,000 crore into the system. SLR rates if slashed further can bring in more liquidity to the market which can bring a positive market sentiment keeping the festive holiday season ahead.