Global economic uncertainty has reduced with many foreign regulators taking action to address the same. The inflation has also not risen much inspite of previous rate cuts. The government has also decided to stick to its target of keeping the fiscal deficit to 3.5% of GDP.
Last year, RBI cut the policy rates by a total of 1.25%. But unfortunately, there was no visible impact of these rate cuts, as borrowers showed no interest in applying for fresh loans. One of the reasons for this could be that banks themselves didn’t pass on the benefits fully to borrowers.
But as of now, various factors that influence RBI’s decision of rate cuts are pointing towards another cut soon. Global economic uncertainty has reduced with many foreign regulators taking action to address the same. The inflation has also not risen much inspite of previous rate cuts. The government has also decided to stick to its target of keeping the fiscal deficit to 3.5% of GDP.
All these factors have strengthened the case for RBI reducing the rate in the new financial year.
Even if one was to do some crystal-ball gazing for FY17, it will be found that with oil prices are expected to remain low and with monsoons expected to be normal, the chances of inflation increasing are pretty low. Some experts believe that in 2016, RBI might cut rates by atleast 0.50%. Of this, it is likely that 0.25% would be offered in the next policy review meet on 5th April. But RBI has in recent times surprised the markets with larger than expected rate cuts. So it’s possible that one might get to see a bigger round of easing than widely expected (-) 0.25%. As for the second round of rate cuts, it will could come after the impact of monsoon at the ground level.
But having said that, it must be noted that despite the 1.25% cut in rates, there hasn’t been much improvement in capacity utilization or companies’ interest coverage ratios. So the expectation that the anticipated 0.50% monetary easing will change things overnight, are bound to be met with disappointment. At best, the optimists should expect to see the benefits of future rate cuts only after few months.
Last year, RBI cut the policy rates by a total of 1.25%. But unfortunately, there was no visible impact of these rate cuts, as borrowers showed no interest in applying for fresh loans. One of the reasons for this could be that banks themselves didn’t pass on the benefits fully to borrowers.But as of now, various factors that influence RBI’s decision of rate cuts are pointing towards another cut soon. Global economic uncertainty has reduced with many foreign regulators taking action to address the same. The inflation has also not risen much inspite of previous rate cuts. The government has also decided to stick to its target of keeping the fiscal deficit to 3.5% of GDP.
All these factors have strengthened the case for RBI reducing the rate in the new financial year.
Even if one was to do some crystal-ball gazing for FY17, it will be found that with oil prices are expected to remain low and with monsoons expected to be normal, the chances of inflation increasing are pretty low. Some experts believe that in 2016, RBI might cut rates by atleast 0.50%. Of this, it is likely that 0.25% would be offered in the next policy review meet on 5th April. But RBI has in recent times surprised the markets with larger than expected rate cuts. So it’s possible that one might get to see a bigger round of easing than widely expected (-) 0.25%. As for the second round of rate cuts, it will could come after the impact of monsoon at the ground level.
But having said that, it must be noted that despite the 1.25% cut in rates, there hasn’t been much improvement in capacity utilization or companies’ interest coverage ratios. So the expectation that the anticipated 0.50% monetary easing will change things overnight, are bound to be met with disappointment. At best, the optimists should expect to see the benefits of future rate cuts only after few months.
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