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The only consolation from the RBI policy is every economist and analyst guessed it right. The 51 analysts and economists polled by Bloomberg unanimously said that RBI governor Raghuram Rajan would keep interest rates unchanged. Rajan obliged by keeping repo rates intact.
Naturally, the industry is not happy with the development. Chandrajit Banerjee, Director General, CII, said that as the twin deficits – fiscal and current account - are well under control, core inflation is trending downwards and industrial production has been muted, this could have been a good opportunity for the RBI to reduce rates.
Banerjee adds that "we are at the threshold of the busy credit season" when the demand for bank credit is anticipated to go up. The onset of the festive season will spur demand for consumer goods. Infusion of liquidity at this juncture, through a reduction in policy rates, would have provided an impetus to the feel good factor brought on by the recent burst of policy announcements made by the government. He however, adds that CII appreciates RBI’s view that inflation needs to be dealt with once and for all.
The broking community, however, seems to be cautiously bullish. Dinesh Thakkar, Chairman & Managing Director, Angel Broking, says he expects that in the coming 6-12 months inflation and interest rates will move lower, which should be a key positive catalyst for investments, growth and capital markets.
Nomura says RBI will have to keep interest rates at current levels to ensure that the growth recovery does not cause a resurgence of inflationary pressures. Nomura does not see rating coming down before 2016, with the central bank likely to maintain stability in policy rates until then. This, however, will bode well for the economy in the medium term as it should ensure a rebalancing by generating higher domestic financial savings to fund investments, says Nomura in their report on the policy statement.
Following are five key takeaways from of RBI Policy:
Advanced economies looking better than emerging markets: Apart from Europe global activity seems to be picking up on the back of strengthening consumer spending and improving labour market conditions in advanced economies. This is largely on account of highly accommodative monetary policy. In emerging market economies (EME) upsurge in domestic demand is still missing on account of structural impediments.
Domestic activity not yet promising: The second quarter of current fiscal has not been able to carry the growth seen in the first quarter. Growth of industrial production slumped in July, as capital goods production followed consumer durables into contraction. Poor rainfall has affected the north-west region of the country while floods have hit the north east region, impacting kharif production. Services sector is showing mixed trend while the purchasing managers’ index points to uncertainty around future prospects. In short, the economy is still not completely out of the woods.
Second half holds the key: According to RBI, the key to a turnaround in the growth path of the economy is a revival in investment activity – in greenfield as well as brownfield stalled projects – supported by fiscal consolidation, stronger export performance and sustained disinflation, which should all happen in the second half of the current fiscal. The central bank is hopeful that all these events will happen in the second half and has thus kept the growth rate projection unchanged at 5.5% within a range of 5 to 6% around this central estimate. The quarterly growth path may slow mildly in Q2 and Q3 before recovering in Q4.
Inflation control continues to be tricky: Though retail inflation has come off on account of lower prices of gold, oil and non-food elements, dependency on external factors can play havoc. Further, future food prices and the timing and magnitude of held back administered price revisions impart some uncertainty to an otherwise improving inflation outlook. Base effects will also temper inflation in the next few months only to reverse towards the end of the year. In his press conference Rajan said that chances of inflation touching the 8% mark are higher than it touching 6%. There are risks from food price shocks as the full effects of the monsoon’s passage unfold, and from geo-political developments that could materialise rapidly.
Liquidity is the only saving grace: Low growth in non-food credit, depressed business activity and availability of alternate source of funding has resulted in a balanced liquidity scenario. On account of improving liquidity Export Credit Refinance (ECR) has fallen substantially giving banks more room to manoeuvre. In order to develop the government securities market and enhance liquidity, the central bank has decided to bring down the ceiling on SLR (Statutory Liquidity Ratio) securities under the HTM category from 24% of NDTL (net demand and time liabilities) to 22% from 24%.
The message coming out of the policy document is clear; the central bank will continue to press on the pause button till the supply side scenario improves. This requires initiatives from the government and a pickup in ground activity.
