Money & Banking

It’s time for Rajan to deliver more rate cuts

NS Vageesh Mumbai | Updated on January 24, 2018

Much-needed push: Given that monetary policy is said to act with a lag ofthree quarters at the minimum, it is better the RBI Governor kickstartsthe process right now.

Move will help boost sentiment, force banks to quicken transmission, spur spending and investment in economy

Will the RBI Governor Raghuram Rajan cut interest rates tomorrow? So far, he has cut the repo rate twice this year by a cumulative 50 basis points to 7.50 per cent.

During the last bimonthly policy review, there was no cut but there were some stern words and even a rare flash of exasperation when asked why transmission by banks was not happening. Well, banks fell in line, although not fully and made some token cuts. The excuse was they had to clean up their books at the end of the last fiscal. This time they may just be willing to do a bit more and pass on the cut to borrowers. Two banks have in a sense, pre-empted the announcement by cutting rates last week.

As usual, the RBI will look at few key parameters — the inflation trajectory, the oil price movement, the spread of the monsoon, the performance of the banking system in the current and preceding quarters, the growth outlook for the economy, the quality of fiscal consolidation and a couple of global factors, including the imminence of a Fed rate hike. And, of course, the hints offered by the Finance Ministry too.

Mixed data

The data on all of the above is mixed. Inflation is down, with CPI inflation at about 4.87 per cent last month. But oil price has been moving up in the past few weeks (from around $50/barrel level two months ago to about $60/barrel currently). The monsoon has just arrived and it is too early in the day to determine whether it will beat the Met Department’s prediction of a below-average monsoon. Agricultural output (kharif crop) is contingent on the quantum and spatial distribution of rainfall and this is still an unknown at this time.

The banking system has not done too well in the fourth quarter of the last fiscal. Most large public sector banks have posted sharp drop in profits. The current quarter (the first quarter of the new fiscal) is traditionally a dull period for credit.

Corporate results that have come in do not show a very good picture but this is in contrast to the macroeconomic scenario which is apparently positive with the economy registering 7.5 per cent growth in the fourth quarter.

In the US, the Federal Reserve was earlier expected to start hiking rates in June but recent data suggest that the economy has not yet recovered to the level they want.

Importantly, the Finance Minister and Chief Economic Adviser have laid out the case for a cut. Last month, KV Kamath, President-designate of the BRICS Bank and former Chairman of ICICI Bank, said in a newspaper interview that any cut less than 200 bps would not have any effect.

Perhaps Rajan should deliver a 50 bps cut rather than the baby steps that have been undertaken till now. Aggregate demand is weak and that is reflecting in weak corporate output and low levels of capacity utilisation in industries, such as steel, cement and automobiles. While a rate cut may not change matters overnight, it will still help boost sentiment and force banks to quicken their transmission and cut rates to spur spending and investment that the economy needs now.

Analysts’ view

Given that monetary policy is said to act with a lag of three quarters at the minimum, it is better Rajan delivers the kickstart right now. Although a CRR cut could help liquidity ease a bit, it is likely that the RBI may wait a bit for credit growth to pick up and offer this sop then. Most analysts had forecast a 75 bps to 100 bps cut in 2015 at the beginning of the year. So far, 50 bps have been delivered. It is time to do more.

Published on June 01, 2015

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