India’s financial markets have been bracing for a fresh wave of rate cut by the Reserve Bank of India ever since the Union Budget, in which Finance Minister Arun Jaitley stuck to a daunting fiscal deficit target for the new financial year.
“It's a whole new world," screamed the ever animated Jim Cramer in his "Mad Money" show after US Federal Reserve’s Chair Janet Yellen acknowledged that the US economy is fragile and the strong US dollar is only making things worse, thus lowering expectation of another rate hike anytime soon.
Far away in India, Yellen also boosted hope of an interest rate cut by the Reserve Bank of India (RBI), which was keenly watching Yellen’s speech for any signal on the next round of Fed rate hike and also possible pressure on the rupee.
India’s financial markets have been bracing for a fresh wave of rate cut by the Reserve Bank of India ever since the Union Budget, in which Finance Minister Arun Jaitley stuck to a daunting fiscal deficit target for the new financial year.
While the central government exhibited fiscal prudence by sticking to the 3.5 per cent fiscal target for FY17, something that RBI has argued for, several other economic developments since the February policy review have also strengthened the case for monetary easing.
For instance, inflation reading for February (at 5.2%) has been much softer than expected. CPI inflation for February came in at 5.2 per cent (much below market expectation and also RBI’s projection of over 5.5 per cent) and the softness is likely to persist in coming months. At a broader level, CPI remains contained around 5 per cent despite two back-to-back monsoon failures, continuous tax hikes (service tax, cess, custom duties) and limited pass-through of the fall in crude oil price to consumers.
On the growth front, the momentum has softened in the recent months, making a strong case for frontloading the monetary easing. This is also corroborated by softness in car sales and railway freight.
It has only helped matters that the US Fed has turned meaningfully dovish. The only uncertainty in this regard is the monsoon outcome.
So will RBI cut rates? It possibly will, simply because it does not have too many excused to not lower rates now. Non-transmission of earlier rate cuts by banks was a strong alibi earlier, but after the recent reforms in interest rates in small savings and the RBI’s own initiative to introduce the MCLR (marginal cost of lending rate) framework, the transmission is bound to be better. This has also created conditions for the central bank to lower rates. However, it remains to be seen if it will be aggressive, because the signals from the US keep changing from time to time and the risk of rate hike looms constantly.
Far away in India, Yellen also boosted hope of an interest rate cut by the Reserve Bank of India (RBI), which was keenly watching Yellen’s speech for any signal on the next round of Fed rate hike and also possible pressure on the rupee.
India’s financial markets have been bracing for a fresh wave of rate cut by the Reserve Bank of India ever since the Union Budget, in which Finance Minister Arun Jaitley stuck to a daunting fiscal deficit target for the new financial year.
While the central government exhibited fiscal prudence by sticking to the 3.5 per cent fiscal target for FY17, something that RBI has argued for, several other economic developments since the February policy review have also strengthened the case for monetary easing.
For instance, inflation reading for February (at 5.2%) has been much softer than expected. CPI inflation for February came in at 5.2 per cent (much below market expectation and also RBI’s projection of over 5.5 per cent) and the softness is likely to persist in coming months. At a broader level, CPI remains contained around 5 per cent despite two back-to-back monsoon failures, continuous tax hikes (service tax, cess, custom duties) and limited pass-through of the fall in crude oil price to consumers.
On the growth front, the momentum has softened in the recent months, making a strong case for frontloading the monetary easing. This is also corroborated by softness in car sales and railway freight.
It has only helped matters that the US Fed has turned meaningfully dovish. The only uncertainty in this regard is the monsoon outcome.
So will RBI cut rates? It possibly will, simply because it does not have too many excused to not lower rates now. Non-transmission of earlier rate cuts by banks was a strong alibi earlier, but after the recent reforms in interest rates in small savings and the RBI’s own initiative to introduce the MCLR (marginal cost of lending rate) framework, the transmission is bound to be better. This has also created conditions for the central bank to lower rates. However, it remains to be seen if it will be aggressive, because the signals from the US keep changing from time to time and the risk of rate hike looms constantly.
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