3rd and 4th October 2017 will be review of the Monetary Policy by RBI. The Business Standard poll reveals that the chances of a rate cut is bleak and that the Central Bank would prefer to watch the proposed fiscal push by the Government, when the inflation rates are going up. Expectations are
- A 25 basis point cut in the repo rate and
- Reduction in Growth numbers downwards.
The monetary figures are detailed as under:
|1||Gross Domestic Product||Dropped to 3 year low of 5.7% in April-June Qtr|
|2.||Retail Inflation rate||Shot up by 3.36% in Aug from July fig of 2.36% in July and 1.5% in June|
RBI target of inflation figure is 4%, and we have reached the lowest of the interest rate cycle, and the ensuing policies would indeed be challenging. The downward trend in the oil prices has helped out in easing of the inflation position. On the contrary, presently the inflation is on the rise resulting in current account deficit due to slow growth of economy. A rate cut is expected on the cards, during December this year due to the following reasons:
- Growth at 5.5per cent expected, which is well below estimated 7 per cent potential
- Consumer Price Index would stabilize at 4.5 per cent during first half of FY 2018, which would be well within RBI’s 26 per cent requirement.
- With domestic supplies and imports of Tomato and Onion prices on increase, the inflation is on the downward trend.
- There is expectation of a healthy relation on the differential between Federations and RBI’s policy rates.
- Fiscal dropping are likely to be compensated by the Government, through expansion of foreign portfolio investments.
- Issues on Farm Loan waivers, which is causing concern, should be amicably settled with the Political Stakeholders.
- Banks should be coming forward to reduce lending rates, due to normalization of Reserve Money growth.
- Permanent deposits created due to Demonetization, amount to 4 trillion.
- Banks are expected to slowly provide loans from the Cash position available and the MSS bonds.
- Also, lower risk free rates which is down by 5075 basis points since April 2016 is also another encouraging factor for a lending rate cut.
Let us wait and see….