RBI Governor Urjit Patel delivered a status quo on rates that wrong-footed many: A rate cut had been seen as a given, the quantum was the question. That said, there are three positives in a hawkish-looking statement that markets may be discounting.
In cricketing parlance, RBI Governor Urjit Patel just bowled a straight one when turn was expected. The mild-mannered central banker delivered a status quo on rates that wrong-footed many: A rate cut had been seen as a given, the quantum was the question.
To stretch the cricketing analogy, markets played for an off break, missed the line, and walked back to the pavilion, like many an English batsman in the ongoing series.
That said, there are three positives in a hawkish-looking statement that markets may be discounting.
— Even though RBI governor did not reduce interest rates, he did something better – he abolished the temporary 100 percent incremental CRR. Since banks were flush with funds post-demonetisation, RBI had announced a 100 percent incremental CRR that was meant to give banks immediate relief. However, as most of the deposits were interest-bearing, banks were at a disadvantage as they had to pay interest on the same but deposits in CRR did not fetch them any interest. SBI managing director Rajnish Kumar was quoted as saying that the bank was likely to bring down its lending rates if the RBI withdrew the additional CRR. Banks will now be able to move their monies from CRR to the recently launched market stabilization scheme (MSS). So the RBI has obliged the banks without cutting rates, allowing interest rates to the consumer to come down. Before demonetisation after all, a CRR cut was viewed as a sign of rate reduction.
— The US Fed meets in just over a week. Expectations are that the Fed will start increasing rates, now that elections are through. A rate reduction by India and an increase by the US Fed would have meant more money leaving India. A risk on strategy in the US, which will be signaled if interest rates are hiked, would result in money leaving Indian shores.
— Growth numbers are not as bad as many had anticipated. Gross Value Added (GVA) has been reduced from 7.6 percent to 7.1. Economists had expected a much severe fall. But as RBI policy states that the “...expected loss of growth momentum in Q3 and waning effects in Q4 alongside the boost to consumption demand from higher agricultural output and the implementation of the 7th central pay commission award” would cushion the fall. A reduction in lending rates by the commercial banks would aid a faster recovery.