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Tomorrow Will Tell

Monday, August 03, 2015

In the midst of high volatility, tomorrow could decide stock markets trends for the next few months. The Reserve Bank of India is to meet to announce its policy review amidst contrasting views and much speculation as to whether a rate cut will be announced or status quo is maintained? So what will RBI Governor Rajan do? What's the expectations at the ground level? ADC collates the views of various institutions...

May Keep Rates Unchanged, Says Ind-Ra
The Reserve Bank of India (RBI) is likely to wait and watch on rates in its third bimonthly credit policy meet, says India Ratings and Research (Ind-Ra). It believes “There is room for RBI to cut rates by another 25bp; however, a more appropriate time for a rate cut would be 2HFY16. Amid evolving growth-inflation dynamics, Ind-Ra expects the policy stance to reflect RBI’s continued intention to anchor both inflation and inflationary expectations. This has become even more important for RBI after its agreement with the government of India to follow a framework of inflation targeting.

On the numbers front, the Wholesale Price Index inflation has remained negative for the last eight consecutive months and stood firm at negative 2.4% in June. The Consumer Price Index (CPI) inflation remains lower than RBI’s guided path target of 6%. Growth in headline CPI inflation accelerated to an eight-month high of 5.40% yoy in June 2015 compared with 5.01% yoy in May 2015, predominantly due to higher food inflation and diminishing base effect. Price increases in some protein-rich items such as pulses, milk and meat caused food inflation to rise to 5.5% in June from 4.8% in May.

The impact of unseasonal rains has also become visible, with a lagged impact on the prices of vegetables and is most pronounced in case of onion. Kharif sowing so far has been encouraging and the rainfall on all India basis till 29 July 2015 was only 3% lower from the long period average. Yet the risk to Kharif crops in view of India Meteorological Department’s prediction of less than normal monsoon remains.

The base effect on inflation will also wane further in the coming months. For Wholesale Price Index, it will kick in from August 2015 and for CPI it will be more pronounced from September 2015, putting pressure on inflation. However, Ind-Ra still expects CPI inflation to remain in the comfort zone of RBI.

In its second bimonthly review, RBI chose to front-load a rate cut of 25bp on the assumptions that (i) the government would carry out efficient food management to mitigate the inflationary effects of less than normal monsoon (ii) there will be a limited increase in agricultural support prices (iii) there would be adequate quantity of seeds/fertilizers for supply to farmers, crop insurance and adequate credit facilities (iv) the government would release food stocks on time and repair disruptions in food supply chains, if any, through imports. RBI will monitor their progress as the monsoons season pans out.

The central bank will also want to wait for cues from the US Federal Reserve on the timing of their interest rate hike. US Fed is likely to tighten policy for the first time in a decade this year, probably in September.Ind-Ra expects average the headline CPI inflation to come in at 5.4% in FY16, which it believes should create room for RBI to lower rates by a further 25bp during 2HFY16.

To Cut Rate To Boost Growth, Says Moody's
Moody's on Thursday said there is room for rate cut and expressed hope that the central bank would reduce it by 0.25% to push growth. In its report -- India Outlook: Waiting for Reforms to Fuel Growth -- Moody's Analytics, an economic research unit of Moody's Corp, also pitched for reforms to achieve its potential growth rate which is around 10%. "We believe the RBI will cut interest rates again this year. There could be two more 25-basis point rate cuts in 2015... Accommodative monetary policy will lift GDP to 7.6% in 2015, increasing to 8% in 2016," it said.

Observing that monsoon is not as bad as anticipated and there has been a general fall in global oil prices, the report said "the decline in commodity prices in general has given the RBI room to cut interest rates". The report also cautioned that lack of reforms in areas such as land acquisition, labour laws and Goods and Services Tax (GST) could "derail medium to long term growth prospects". "Though the economy has been in a cyclical upswing since late 2014, it has failed to gain broader momentum. Green shoots are slowly emerging, but the government's failure to deliver promised reforms is the major impediment," it said.

To Keep Key Rate Unchanged, Says DBS
The Reserve Bank of India is likely to keep the benchmark repo rate unchanged at 7.25% in its policy review meet next week, a DBS report says. "We expect the benchmark Repo rate to be held unchanged at 7.25% after cumulative 75 bps cuts since January 2015," DBS said in a research note last week.

There's Scope For Further Cuts In Lending Rates, Says HDFC Bank
HDFC Bank last week said there is a scope for further cuts in the lending rates as loan growth is trailing deposit growth. "There has been a slight pick-up (in deposit growth) and more importantly deposit growth is outpacing loan growth," HDFC Bank Deputy Managing Director Paresh Sukthankar told reporters here.

He added that this will result in a cut in deposit rates, which are generally a pre-cursor for lending rate cuts."It's only when the banks reduce their deposit rates that they can re-calibrate their base rate ... Meaningful movements in base rates would have to follow changes in deposit rates," he said, adding that the general direction of the rates is downward. Sukthankar said he expects lending rate cuts of up to 0.50% by the RBI in its policy in this fiscal, which will "induce" banks to also effect cuts in their respective lending rates.

More Rate Cuts Needed, Says ICRA
Rating agency ICRA last week said concerns on inflation are ebbing and the Reserve Bank should slash the key rates at the forthcoming policy meet for better transmission of its moves by lenders. "Consumer price inflation seems likely to undershoot the central bank's projection of 6% in January next, brightening the prospects of a repo rate cut of 0.25% during the ongoing quarter, provided that food prices remain in check," ICRA managing director Naresh Takkar said.He said an early cut "may be warranted" as tighter liquidity conditions after the onset of the busy season would impede the process of transmission to bank lending rates. The ICRA view is contrary to general expectations of a status quo at the bi-monthly policy announcement on August 4, as fears on inflation have not subsided.

On the monetary transmission, it said lenders have been slow to pass the cumulative 0.75% cut by the RBI this calendar year. "With systemic liquidity likely to tighten post the onset of the busy season for credit offtake in the third quarter, an upfronting of the next rate cut to August 4 policy may, to an extent, support a quicker transmission of monetary easing to bank lending rates," it said.

Likely To Maintain Status Quo, Says Exim Bank
According to the Export-Import Bank of India (Exim Bank), the rising trend in inflation observed during the last two months and the rainfall deficits are expected to weigh over the considerations of weak economic performance (slack IIP, Trade, Investment numbers and Bank Credit offtake). Consequently, policy rate cut by the RBI in its third bi-monthly policy appears bleak. RBI is likely to maintain status quo on rates in its bi-monthly policy meet tomorrow.

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