This once the monetary policy won't surprise. A 25 basis point (bps) cut in the repo rate appears a given. For one, the governor himself told CNBC at Jackson Hole that he is "still in accomodation mode," and that he is "not done" with cutting rates.
Also in the previous policy while stating that he would look for emerging opportunity for accommodation, he had said he would watch inflation data, monsoons and the international scenario.
All three conditions have been largely met: both the July and August inflation readings have come below the RBI's stated trajectory despite a poor monsoon, global commodity prices are at multi year lows, global growth has been revised lower by organizations like OECD and ADB and the rate hike by the Fed looks postponed by at least a month, may be by a quarter. Hence an easy bet to win is the governor will cut rates by 25 bps and base it on a lower consumer inflation forecast for January 2016 at 5.5-5.7 percent versus the 6 percent guided earlier.
The key point to watch is whether he will show a penchant for further cuts, whether he will retain the phrase," look for emerging opportunity for accommodation". Chances are he won't guide for further cuts.
Firstly, at 5.5 percent CPI for Jan-March 2016, if one were to add the 1.5 percentage point real return that the RBI has been desiring as fair to savers, the policy repo rate will stand at 7 percent.
Secondly, standing in October 2015, the RBI will want to push its goal post from Jan 2016 to Jan 2017 targets. That target for 2017 will likely be set at 5 percent, in step to reach 4 percent by 2018. A central bank desirous of bringing down the inflation from 5.5 percent to 5 percent, is unlikely to have much space for rate cuts.
Thirdly, while at 3.76 percent the August inflation is below target, shorn of base effect it is still close to 5.5 percent. Fourth, the 3.76 percent is more a gift of global deflation. India's inherent and sustainable inflation is better measured by services inflation: education, medical and household services ( which are unaffected by imported prices and monsoons). Prices of these services are still rising at 5.5 percent as the August CPI indicated. Unless these prices dip towards 5 percent, the Governor may be disinclined to cut rates below 7 percent.
The more interesting document on September 29 will be the RBI's monetary policy report which will contain its inflation trajectory until March 2017. That document will have to deal with several tough premises.
Firstly, the 3.9 percent fiscal deficit promise is still a hope, even after the aggressive dividend extracted from the RBI. Also, the government has kept the benefits of the fall in crude prices below USD 70 per barrel for itself. Any further advantages to the CPI from low crude prices may not flow in 2016. The impact of higher services taxes are yet to be felt on services inflation.
More importantly, in April 2016, the composition of the Rajya Sabha is set to change to reflect new state govt majorities. One can't rule out that the GST will be a reality in 2016 itself. The GST will definitely add to inflation.
Global deflation in 2016 may not be as it has been in 2015: As the world adjusts to an El Nino year in 2015, global grain prices may edge up. Also mothballing of metal capacities can obviate further falls in commodity prices in 2016. The Fed may hike rates in Dec and possibly a few times in 2016. Depreciation in the rupee will have to be factored.
On the other hand, there are some positive developments in India: the expenditure on infrastructure like roads and railways, and restarting of stalled infra projects will hopefully improve the supply side and help the economy support higher growth with lower inflation. Short point, the RBI is justified in watching for developments before committing to further rate cutting.
There are a couple of other issues that various constituencies will watch. Will the RBI lower the SLR, the amount of g-secs that banks have to compulsarily buy? The governor hasn't touched the SLR for almost a year but a timetabled reduction is called for, both to give space for banks to lend to corporates and to put the government on notice that it ought not to depend on free lunches.
The RBI will also have to take a call on whether it will allow foreign funds to buy more government debt. Separately, India Inc will watch out for any timetable for 'on tap' bank licenses. It will be interesting to see if there is any game plan announced to help co-operative banks win banking licenses.
Ultimately it will be the interest rate announcements that markets will watch. Though, paradoxically, at the moment RBI's rate cuts don't matter to India Inc or to the vast majority of "silent" savers or to those who have EMIs to pay. The 75 bps cut by RBI has only resulted in a 30 bps cut in lending rates by State Bank of India (SBI) and ICICI Bank. What will be key at the policy meeting is how much the governor is able to goad or armtwist the banks into transmitting his cuts. The SBI asset liability committee (ALCO) meets on Tuesday evening. This once, the outcome of the SBI meeting may be more important for India Inc than RBI's.
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