Markets rising on hopes of a pleasant surprise
R Chandrasekaran
CHENNAI: The Reserve Bank of India’s annual monetary policy review meet scheduled on May 3rd is likely spring a pleasant surprise for investors.
After a number of indicators favoring a possible interest rate reduction, the latest data of HSBC manufacturing purchasing managers’ index (PPI) has only further boosted the clamor for rate cut. The PPI index skids for the second consecutive month in April to 51.0 from 52.0 in the previous month and was the weakest after November 2011. While the RBI may not have to take this reading cue for a policy review, the survey could be a shot in the arm for those who are clamoring for interest rate cut.
The economic indicators such as GDP reaching a decade low of 5 percent for the fiscal year ended March, inflation easing to 5.9 percent in March, which was lower than the central bank’s expectations of little over 6 percent, and the PPI index reaching its low will undoubtedly alter the RBI’s observation on economy.
In March, the central bank viewed that there was limited opportunity for further monetary easing in the face of inflationary pressures, deteriorating current account deficit and a slowing China economy. Though the RBI reduced the interest rates by 25 basis points then, the guidance had hurt market sentiments.
However, in contrast to the views expressed in March, the ground reality has changed now. In fact, this could probably be the easiest policy decision during the period of the RBI Governor D. Subbarao, who will probably be heading his last annual monetary policy meeting before his retirement.
The cooling of oil prices, fall in gold price, better than expected easing of inflation, and the prediction of a further easing of inflation in the short term will undoubtedly make the governor’s choice for a rate cut easier. Even the concern on current account deficit has come down from the earlier feared level. Therefore, the governor will not be tied down by both current account deficit and inflation.
It is a well-known fact that the central bank has not been as enthusiastic as the government to cut interest rates due to inflation and current account deficit. The situation has definitely changed from what the RBI viewed in March.
Additionally, initial trend in early April also indicated that credit growth has reached 13.9 percent lower, which is over a three-year low, as companies started shelving projects and consumers desisted from making any big purchases. This apart, banks are also wary of increasing bad loans.
Looking from every aspect, it is quite clear that investors expect more than just a rate cut from the RBI when it meets on Friday. A poll conducted by Reuters suggests that the central bank will likely reduce interest rates by 25 basis points. However, trade bodies such as Federation of Indian Chambers of Commerce and Industry and Confederation of Indian Industry were demanding up to 100 basis points cut in rates.
The RBI could consider reducing cash reserve ratio or CRR of banks to ease liquidity, which is still to show improvements. Currently, CRR is 4 percent, which is lowest since 1976. While there is a near unanimous view that it should be left as it is the central bank springing a surprise by announcing a reduction in CRR is not ruled out completely. Similar is the case with standard liquidity ratio or SLR.
The recent sharp fall in gold price will also make the RBI to tighten its noose on lending norms to gold by banks besides over the counter sales by it.
The Indian stock markets, which is expecting a pleasant surprise from the central bank, have been gaining over the last few days on rate cuts hope. If the RBI cannot meet the market expectations and disappoints, the markets could well see a sharp fall.
To contact the author, e-mail:Â rchandrasekaran@americanbazaaronline.com