A Week Ahead of India Elections 2019, Should RBI Change the Repo Rate?
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As India embraces the new financial year, the nation has set the tone right for its upcoming Loksabha elections. The polls will be held in seven phases from April 11 to May 19 and cover 543 constituencies.
But a week ahead of the polls, the Reserve Bank of India (RBI) is also set to announce its bi-monthly monetary policy and review its key interest rates. Last February, the Monetary Policy Committee, which is led by Governor Shaktikanta Das, reduced the policy repo rate by 25 basis points from 6.50 per cent to 6.25 per cent.
So, with the election just around the corner, will the central bank look at another rate cut?
The major objective of the monetary policy is to maintain price stability while keeping growth in mind. Presently, inflation is under control. FY20’s headline inflation is likely to average around 3.8 per cent, which is more or less under RBI’s target.
In fact, in the last bi-monthly, the RBI even changed its stance from ‘calibrated tightening’ to neutral – a move hailed across sectors.
About the upcoming monetary policy, V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services, feels that the RBI has been undershooting its inflation and GDP growth forecasts in the recent quarters. Since both inflation and growth are lower than projections, it is time to change the policy stance once again, this time from ‘neutral’ to ‘accommodative’.
“CPI inflation is currently at 2.57 per cent (February). This means that with repo at 6.25 per cent the real rates are above 3 per cent, which is excessive in a slowing economy. The time is ripe to change the stance now to become accommodative. This will enable the market to discount further rate cuts,” he added.
Having said that, industry experts anticipate that Das could get a little carried away and cut the repo with 50 basis pointe. Vijayakumar says that 50 basis point cut is preferable but the move will not be appreciated.
“The move may be desirable but is unlikely on the eve of the general elections since such it is likely to invite criticism that the RBI under the new governor is acting in tune with the government’s wishes,” he explained.
What Should RBI Do
Earlier this year, the monetary transmission was an important issue which was led by the tightness of liquidity in the system and poor deposit growth. However, RBI’s Dollar Swap initiative seems to have to ease the problem for now.
In order to meet the liquidity needs of the economy, on March 26, the apex bank bought $5.02 billion at a premium of INR 7.76. “The US Dollar amount mobilized through this auction would also reflect in RBI’s foreign exchange reserves for the tenor of the swap while also reflecting in RBI’s forward liabilities,” RBI said in a statement.
Furthermore, earlier this week the RBI announced a similar auction on 23rd April.
Amar Ambani, President and Head of Research, Yes Securities suggests the RBI to look more Dollar Swaps for better transmission of previous rate cuts along with open market operation (OMO), possibly reducing SLR or even cutting on CRR (on all holdings or perhaps incremental flow) as another headline cut in rates can always wait for later in 2019.
“There’s ample time and the trajectory is relatively clear. Pausing on rates now also gives them the opportunity to closely monitor El Nino weather shocks, vegetable and cereal inflation, effects of consumption stimulus offered in the Union Budget, the recent acceleration in wages and geopolitics,” he noted.
Will the RBI support the government talks or looks at the economy of the country in the upcoming policy review, only time could tell!