The RBI re-iterated its focus on managing inflation and inflation expectations. With the inflation target of 6 percent by January 2016 well within reach, the RBI guided for maintaining accommodative monetary policy stance and future policy actions to be data dependent.
Over the last few weeks, a few key variables namely USD-INR rate, crude oil price and US Treasury (UST) (10 year yield) registered an adverse movement. As a result, some market participants are expecting that the Reserve Bank of India (RBI) may hold back interest rate action on June 02, 2015.
Overview
To begin with, let’s go back to the RBI‘s last policy announcement on April 02, 2015:
The RBI re-iterated its focus on managing inflation and inflation expectations. With the inflation target of 6 percent by January 2016 well within reach, the RBI guided for maintaining accommodative monetary policy stance and future policy actions to be data dependent. The RBI is also closely watching at some of the following events to trigger action.
Transmission by banks of RBI’s front loaded rates reduction in January and February 2015 into their lending rates
In-spite of clear indication by the RBI in its post policy press conference asking banks to bring down lending rates in the system citing 50 bps repo rate cut, we have seen only a handful of banks obliging by reducing their base rates by 10-25 bps. However we expect lending rates to come down with a lag as banks will take time to re-price high cost deposits to lower levels and thereby making room for cut in base rates. Easing of liquidity in the next one and a half months may help this movement.
Development in sectorial prices, especially food, though the RBI will look through both seasonal as well as base effect
Latest Consumer Price Index (CPI) inflation eased to 4.87 percent for the month of April 2015 against 5.17% in the previous month and food price inflation particularly declined to 5.4 percent against 6.3 percent despite of unseasonal rains in the month of February and March 2015. The decline in inflation can be marginally attributed to positive base. However, prices of protein rich food items have also declined. The inflationary pressures were seen only in pulses signifying nil to marginal damage by rains. This possibly is achieved through supply side management by the government.
Progress on repurposing of public spend from poorly targeted subsidies
Reduction in fertiliser subsidy through new urea policy, direct cash transfers of LPG and kerosene subsidy and decontrolling of diesel prices entirely are the few steps taken in this direction.
Reduction in pipeline of stalled investments
Push for smart cities, new road projects, exit policy for completed projects, effort to improve ease of doing business and clean Ganga projects are expected to re-ignite stalled investments in the economy and provide impetus for new investments.
Signs of normalisation of US monetary policy, though India is anticipated to be better buffered against volatility
The Federal Open Market Committee (FOMC) kept policy unchanged at its April 2015 meeting and continued its guidance of policy rate decisions to be data dependent. The economic data presents a mixed bag and we expect first rate hike by Federal Reserve not happening before September 2015 policy, giving India enough room to continue with easing monetary stance.
Thus, there is progress on most of the counts, though small as the intervening time gap is not large.
Further, we have looked at levels of INR, UST and crude oil on the previous policy announcement days in March and April 2015.
The variables have hardly witnessed any major change between this period. The INR has moved down by about ~3 percent, whereas crude oil dropped to USD 54 per barrel in April 2015 but currently is trading at USD 65 levels. The UST also rallied in April 2015 and has reverted to higher levels.
However, we feel that the movement is within a range and has been quite muted.
Conclusion:
We think the RBI may closely look at the progress on the five counts as listed above, which points at a stronger case for interest rate cut during its second bi-monthly policy meet in June. Moreover, the key variable levels have not moved quite widely, so the case for interest rate cut may not be spooked by volatility.
Overview
To begin with, let’s go back to the RBI‘s last policy announcement on April 02, 2015:
The RBI re-iterated its focus on managing inflation and inflation expectations. With the inflation target of 6 percent by January 2016 well within reach, the RBI guided for maintaining accommodative monetary policy stance and future policy actions to be data dependent. The RBI is also closely watching at some of the following events to trigger action.
Transmission by banks of RBI’s front loaded rates reduction in January and February 2015 into their lending rates
In-spite of clear indication by the RBI in its post policy press conference asking banks to bring down lending rates in the system citing 50 bps repo rate cut, we have seen only a handful of banks obliging by reducing their base rates by 10-25 bps. However we expect lending rates to come down with a lag as banks will take time to re-price high cost deposits to lower levels and thereby making room for cut in base rates. Easing of liquidity in the next one and a half months may help this movement.
Development in sectorial prices, especially food, though the RBI will look through both seasonal as well as base effect
Latest Consumer Price Index (CPI) inflation eased to 4.87 percent for the month of April 2015 against 5.17% in the previous month and food price inflation particularly declined to 5.4 percent against 6.3 percent despite of unseasonal rains in the month of February and March 2015. The decline in inflation can be marginally attributed to positive base. However, prices of protein rich food items have also declined. The inflationary pressures were seen only in pulses signifying nil to marginal damage by rains. This possibly is achieved through supply side management by the government.
Progress on repurposing of public spend from poorly targeted subsidies
Reduction in fertiliser subsidy through new urea policy, direct cash transfers of LPG and kerosene subsidy and decontrolling of diesel prices entirely are the few steps taken in this direction.
Reduction in pipeline of stalled investments
Push for smart cities, new road projects, exit policy for completed projects, effort to improve ease of doing business and clean Ganga projects are expected to re-ignite stalled investments in the economy and provide impetus for new investments.
Signs of normalisation of US monetary policy, though India is anticipated to be better buffered against volatility
The Federal Open Market Committee (FOMC) kept policy unchanged at its April 2015 meeting and continued its guidance of policy rate decisions to be data dependent. The economic data presents a mixed bag and we expect first rate hike by Federal Reserve not happening before September 2015 policy, giving India enough room to continue with easing monetary stance.
Thus, there is progress on most of the counts, though small as the intervening time gap is not large.
Further, we have looked at levels of INR, UST and crude oil on the previous policy announcement days in March and April 2015.
The variables have hardly witnessed any major change between this period. The INR has moved down by about ~3 percent, whereas crude oil dropped to USD 54 per barrel in April 2015 but currently is trading at USD 65 levels. The UST also rallied in April 2015 and has reverted to higher levels.
However, we feel that the movement is within a range and has been quite muted.
Conclusion:
We think the RBI may closely look at the progress on the five counts as listed above, which points at a stronger case for interest rate cut during its second bi-monthly policy meet in June. Moreover, the key variable levels have not moved quite widely, so the case for interest rate cut may not be spooked by volatility.
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