Will the Reserve Bank of India (RBI) lower repo rate (key interest rate) at its June 6-7 meeting, given that inflation is at a record low (2.99 percent in April) and far below its target of 4 percent to revive a sluggish economy?
Economists by and large do not think so. The Monetary Policy Committee (MPC) meeting of the RBI commences from Tuesday, amid fresh macroeconomic data.
RBI slashed the repo rate last time in October 2016 from 6.50 to 6.25 percent. Since then, the rate has remained unchanged.
CRR, or cash reserve ratio, is the fund banks have to keep with the RBI. The current CRR is 4 percent. A lower CRR would mean more money available with banks for lending.
Radhika Rao, economist, group research, DBS Bank, also argues in favour of a likely status quo, saying a rate cut won’t translate into lower lending rates by banks.
“Despite the 175bp rate cuts since early last year and part of these transmitted through the banking channel, industry loan growth has stagnated and investment demand slowed to 2.4 percent YoY in FY17 from 6.5 percent year before. Another measured cut will thereby do little to change these dynamics,” she said in her note on Monday.
“Hence the benchmark rates are likely to leave unchanged, with lowering of the official GVA and CPI inflation projections to provide the room for the policy guidance to soften. Rate hike bets have completely unwound,” Rao added.
Financial year 2016-17 was marked by a significant event — demonetisation — that saw a surge in deposits while credit growth plunged to a six-decade low of 5.08 percent. Deposits grew 11.75 percent, as people rushed to banks to deposit the demonetised notes.
The current fiscal won’t see much improvement in terms of a pick-up in lending, according to Premsingh. “Bank credit slowdown is led by a shrinking in industrial credit, which is the biggest component, accounting for 35% of total bank credit. As long as India’s industrial growth piece is not functioning at its optimum levels, credit growth will continue to be sluggish,” she said.
Radhika Rao of DBS Bank feels the economy could pick up momentum in June quarter after the 6.1 percent GDP growth rate (5.6 percent GVA) for the March 2017 quarter, but slow down again.
“Into 2Q (June 2017 quarter), the momentum is likely to be more positive, with on-track remonetisation, normal monsoon, better wage growth, lower financing costs and fresh action to address the banking sector challenges. Growth might soften temporarily in 3Q (September 2017 quarter) yet again in wake of GST implementation, but return to trend late-year,” she wrote.
As already reported, the Goods and Services Tax (GST) regime will be rolled out from July 1, 2017.
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