There is a compelling reason for the central bank to trim interest rates further after two unscheduled rate cuts earlier this year. RBI needs to initiate a few measures in order to enhance liquidity, ensure credit growth and in the process stimulate economic recovery.
All eyes are focused on the key RBI monetary policy meeting on June 2nd, wherein market participants and economists are unanimously yearning for an interest rate cut. Expectations are calling for 25 basis points cut in the repo rate and some relaxation on the cash reserve requirements. Moderation in inflation and slower growth provides the much needed maneuverability to the central bank to reduce interest rates. In this respect, growth in consumer prices has eased to 4.87% in April, compared with the reading of 5.25% in March. Meanwhile, wholesale inflation contracted for the sixth consecutive month. Food prices have softened notwithstanding a series of unseasonal rains in most parts of the nation this year.
Source: Bloomberg, India Infoline Research. Note: CPI numbers are from the new data series, beginning from 2014
Source: Bloomberg, India Infoline Research
On growth side, India’s industrial output growth during March slowed to five-month low of 2.1%, compared with a reading of 4.1% in February. On broader terms, although India’s economy grew 7.5% during the last quarter of the fiscal year 2014-15, the third quarter GDP growth was downwardly revised to 6.7 from the previous estimate of 7.5%. In addition, consolidation on the fiscal side also provides the central bank more leeway to act. The fiscal deficit for the year 2014-15 was reported at 4% of GDP, lower than the government’s initial target of 4.1%. For the fiscal year 2015-16, the government aims to moderate the deficit further to 3.9%. On current account balance as well, the deficit has been moderated to a larger extent, thanks to sharp descent in energy prices. Resilience in the domestic currency is also a positive signal. Of late, healthy capital inflows in equity and debt markets and sufficient FOREX reserves have insulated Indian rupee from the volatility in the international currency markets. Meanwhile, recent action in the bond markets also exhibit the probability of an interest rate cut, wherein 10-year benchmark sovereign bond yields have retreated back from the highs of 8%. The yields for old benchmark 8.4 G-Sec 2024 is quoted at 7.82%, while the yield for new benchmark 7.72 G-Sec 2015 is trading at 7.64%.
However, the probability of poor monsoon can play a spoilsport, as far as the broader interest rate trajectory is concerned. India’s Meteorological Department has warned that there is a strong possibility of monsoon being below normal this year, with the total rainfall expected at 93% of the normal monsoon. IMD will update the forecasts this month, however they have ruled out any major changes to the projections.
Source: Bloomberg, India Infoline Research
RBI needs to initiate few measures in order to enhance liquidity, ensure credit growth and in the process stimulate economic recovery. Culmination of the mentioned factors can prove compelling for the central bank to trim interest rates further after two unscheduled rate cuts earlier this year.
On growth side, India’s industrial output growth during March slowed to five-month low of 2.1%, compared with a reading of 4.1% in February. On broader terms, although India’s economy grew 7.5% during the last quarter of the fiscal year 2014-15, the third quarter GDP growth was downwardly revised to 6.7 from the previous estimate of 7.5%. In addition, consolidation on the fiscal side also provides the central bank more leeway to act. The fiscal deficit for the year 2014-15 was reported at 4% of GDP, lower than the government’s initial target of 4.1%. For the fiscal year 2015-16, the government aims to moderate the deficit further to 3.9%. On current account balance as well, the deficit has been moderated to a larger extent, thanks to sharp descent in energy prices. Resilience in the domestic currency is also a positive signal. Of late, healthy capital inflows in equity and debt markets and sufficient FOREX reserves have insulated Indian rupee from the volatility in the international currency markets. Meanwhile, recent action in the bond markets also exhibit the probability of an interest rate cut, wherein 10-year benchmark sovereign bond yields have retreated back from the highs of 8%. The yields for old benchmark 8.4 G-Sec 2024 is quoted at 7.82%, while the yield for new benchmark 7.72 G-Sec 2015 is trading at 7.64%.
However, the probability of poor monsoon can play a spoilsport, as far as the broader interest rate trajectory is concerned. India’s Meteorological Department has warned that there is a strong possibility of monsoon being below normal this year, with the total rainfall expected at 93% of the normal monsoon. IMD will update the forecasts this month, however they have ruled out any major changes to the projections.
RBI needs to initiate few measures in order to enhance liquidity, ensure credit growth and in the process stimulate economic recovery. Culmination of the mentioned factors can prove compelling for the central bank to trim interest rates further after two unscheduled rate cuts earlier this year.
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