RBI’s Monetary Policy: Room for a rate cut never existed
So Reserve Bank of India (RBI) finally kept the status quo maintained keeping up with the popular belief that rates will not be cut anymore. Although certain section expected Cash Reserve Ratio (CRR) may be pared down from 4 per cent to make the cost of funds cheaper, the central bank didn’t oblige.
RBI clearly indicated in the first bi-monthly monetary policy announcement for the fiscal year 2015-16 that unless banks pass on the dual rate reductions (in January and March) and improve transmission, further rate cut (if any) is restricted.
Interestingly, soon after major banks including SBI, ICICI, HDFC and Axis reduced rates by 0.15, 0.25, 0.15 and 0.20 respectively.
Was there any scope for a rate cut in the first place?
RBI has made it clear on many occasions that it wants to hold rates in the range of 1.5-2 per cent. At present repo or repurchase rate stands at 7.50 per cent. One basis point is one-hundredth of a percentage point. In the latest RBI expects consumer price inflation (CPI) to remain at 5.8 per cent by the year end. It expects it to come down to 4 per cent during midyear only to raise its head towards the end of the year.
So, at maximum, 0.25 per cent rate cut could only be afforded by the central bank and that brings the policy rate to 7.25 per cent.
Nevertheless, it all depends on how the US Fed Reserve acts, transmission of earlier rate cuts is done by banks, inflationary forces behave and supply-side bottlenecks are cleared by the NDA government. Although commodity prices are expected to remain in control globally, and with latest Iran deal oil prices may remain cam for more days ahead, it’s unseasonal rains which may spoil the game. Though Indian buffer stock is over stocked to counter any such problem but only future figures can give the true count of the situation.
Still, the inflation target confines further space for RBI to ease policy rates.