Bi-monthly Monetary Policy Statement for 2016: What Will RBI Do?
Reserve Bank is about to release its first bi-monthly monetary policy of fiscal 2016-17 on
April 5. As always, when the time of policy review nears, the main point of discussion in
the markets becomes:“By what magnitude will RBI oblige?”
The answer may be currently hidden, anticipation in the air (in addition to valuable convergence of domestic and global factors indisputably) commands the bourses to discount a rate cut in range of 25 basis points. So, a kind of subtle certainty is already prevailing in the air. But, what the exact number will be is a question worth mulling over.
Considering the present scenario, the Central Bank looks all the highly forthcoming in
slashing rates post the fiscal restraint shown by the government in the budget. The
Reserve Bank of India (RBI) wanted the government to contain the high fiscal deficits
which are primarily responsible for continuing inflationary pressures on the economy. The
government did such by restraining fiscal deficit by 3.5 percent of the gross domestic
product (GDP) for the present financial year and hence, the Central Bank should move
towards lowering interest rates.
The situation is ideal for the RBI to go ahead and lower the rates especially when the
bond market appears calm as 10-year government yields have come off by more than 20
basis points since the announcement of budget. Additionally, Consumer Price Index-based inflation has
come under at a lower than expected 5.2 percent in February.Sliding crude & commodity prices and weak
global scenario has lightened up hopes for a substantial rate cut all the more.
Industry also expects RBI to cut rates since manufacturing is still fighting excess capacity
and industrial production data remains sluggish. In order to fire up weak investment
climate a cut in interest rates is doctor’s prescription, as per them.
Bankers expect the RBI to cut rates significantly so as to address liquidity issue.This
group is all the more optimistic following the recent reduction in small saving rates by the
Arundhati Bhattacharya, Chairman, State Bank of India, recently said, “We expect the RBI
to address the issues of systemic liquidity. Currently, the issue of high volatility in
currency holdings of public (both in the form of cash and jewellery) as well as the
government’s cash balances with RBI is leading to volatility in system liquidity. To this
end, the government’s cash balances may be placed with public sector banks, instead of
with RBI, so that the cash remains within the banking system and does not create
unnecessary volatility in money markets.”
On the global front, Fed hasn’t shown any contingency in reducing rates in the US and this
further cements the case for the RBI.
A cut is more or less certain but what’s important is the magnitude. If it’s 25 basis points,
well and good, but anything near 50 basis points will surely be a positive surprise.