RBI MONETARY POLICY

RBI MONETARY POLICY

Reserve Bank of India maintained its status quo with policy rates being held in its fifth bimonthly monetary policy. Though all the business channels claimed that RBI had stuck to its script, I think it was a sequel to the previous October policy when our governor handed us pre diwali gift hampers of 50 basis point cut. One basis point is one hundredth of a percentage point. Everybody knows that Fed is going to make things difficult for us, so it was right on the central bank’s part to start work early. There has to be a time lag between our monetary policy rate cuts and US Fed hiking its interest rates. With the GDP coming at 7.4% in September quarter on a strong base of 8.4% in the corresponding period previous year, expecting a rate cut would have been really naïve.

As per the RBI’s accommodative stance, it meant we have done enough (cutting 125 basis points since January) and the results are showing so let’s wait and watch. Manufacturing sector growth is up by 9.3% and even agriculture rose by 2.2% despite of poor monsoons. Major takeaways from the policy were the confirmations given by the central bank which led our benchmark indices both Sensex and Nifty closing in positive territory at the day’s end. First and foremost, economy is definitely recovering with certain areas of concern. Secondly marginal cost of pricing model for the banks will be out within a week and last but not the least the pay commission benefits will be offset by government fiscal tightening (no major impact on inflation).

Though RBI downplayed the Fed meet in the coming few days as a residual factor, its accommodative stance will certainly come into play incase the markets upheaval is manageable in the coming quarter. With respect to Banks, government is deliberating on linking small savings rate to market based interest rates and marginal rate pricing is expected to be used on incremental loans for effective transmission of rate cuts. In addition to that, banks (especially PSUs) are expected to complete their clean up process by March 2017.  

Though the policy seems to be a non event, the work was always on with rate cuts being done over the past few months taking into consideration the whole global scenario including improving US economy. So now we just need to sit and watch what the Fed will do and earlier than that the ECB’s stance in the next 48 hours.