RBI is scheduled to announce its last monetary policy of the fiscal today.
In the second monetary policy since demonetization, most experts are expecting that the central bank will move away from its status quo on key policy rates and cut them by 25 bps. A hundred basis points make a percent.
However, a Care Ratings report says that there are at least three reasons why the Reserve Bank of India may defer a repo rate cut this time too. Repo rate is the rate at which the RBI lends money to the banks. In the first monetary policy outing since demonetization in December, the government had kept its rates unchanged at 6.25%.
The Care Ratings report says there are reasons it may maintain its status quo.
a) There is a threat to inflation with crude oil prices rising
"CPI inflation has been around the RBIs target level of 4% with a band of =/-2%. The inflation rate stood at 3.63% in November 2016 and even at lower number of 3.41% in December 2016. However, global commodities have come off their lows as metal prices have started firming up and so have the crude oil prices on account of OPEC members tending to follow the signed agreement to cut the oil production. This would naturally have an impact on fuel inflation and consequently on WPI inflation. This could probably become one of the reasons for RBI not to change the repo rate in the monetary policy."
b) Banks have already lowered their rates due to market conditions
"MCLR has been significantly lowered down to 7.98% in January 2017 from 9.05% in April 2016. This can be largely attributed to presence of excess liquidity in the banking system due to surge in deposits after demonetization.
As the MCLR has already been decreased by most of the banks, this is a reason for RBI not lowering the interest rates in tomorrow’s monetary policy review."
c) Bank credit growth is likely to remain low key in these two months and hence the RBI can consider the cut in the next policy
Bank credit growth declined after demonetization, coming down to 2.3% versus 7.9% in April 2016 and January 2017. There was a slowdown in credit growth in agriculture, retail and services segments and industry.
"Unless there is a significant turnaround in the state of industry, it is unlikely there will be substantial recovery in demand for credit in the last two months of the year. Hence, from the point of view of policy perspective, the decision taken would not have to take into account any significant pick up in bank credit for the rest of the year," the report said.
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