RBI may keep rates on hold this time

Mumbai: The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) may keep rates on hold on Thursday but inject more liquidity in the financial system to ensure transmission of its previous policy cuts in bank lending rates.

Weak monetary policy transmission is likely to be a major concern when the MPC headed by RBI Governor Shaktikanta Das meets for three days beginning June 3 to firm up the second bi-monthly monetary policy of the fiscal.

While the apex bank had cut the short-term lending rate (repo rate) by 50 bps since February to boost economic growth, the average bank lending rates have declined by only 5 bps, showed the publicly available data till April. Notably, several banks have cut the marginal cost of lending rate (MCLR) by a symbolic 5-15 basis points. In fact, several banks have rather raised deposit rates since February. Banks are not ready to cut rates as depo-sits and household  savings are at historical lows.

Prachi Mishra, Chief Economist at Goldman Sachs says five factors may make the RBI to keep policy rates on hold: (1) uncertainty about oil prices, (2) weak El Nino conditions, and its implications for south-west monsoon, (3) with some evidence on firming up of wholesale and retail prices of food, (4) incomplete transmission of the 50 bps reduction in the policy rate, and therefore, (5) a cautious wait and watch approach to make progress on more complete and faster transmission  and also to evaluate the implications of any new government policies for growth and inflation.

"Our call is in line with market expectation—market pricing of less than 50 per cent chance of a cut in policy rates in June. However, we do see continued liquidity injections to take place in the near term, through open market operations (OMOs), FX tools, and regulatory measures, in line with the clear forward guidance provided by the RBI during the last MPC," said Mishra.

The liquidity deficit has fallen from an average of Rs 86,500 crore in April 19 to Rs 46,500 crore in May 19 and the RBI may look at taking it to neutral level.

Sameer Narang, Chief Economist at Bank of Baroda, said, "There are many factors which may make the MPC to be in wait and watch mode. For instance, the pre-monsoon showers are below normal. Hence, the sowing activity is behind, which may drive food prices higher...The MPC would also want to know the fiscal stance of the government on July 5. However, on the positive side, oil prices have fallen by 10 per cent in May 19."

The bond market, however, is expecting the MPC to cut rates as the economic growth has plunged to a 20-quarter low to 5.8 per cent in Q4 FY19 and inflation remains benign. The full- year FY19 GDP growth has come to a five-year low at 6.8 per cent compared to 7.2 per cent in FY18. The 10-year benchmark bond yield ended the week at 7.03 per cent and yields have fallen by 32 bps since the last policy due to a fall in oil prices and expectations of a rate cut in June, added Narang.

Madan Sabnavis, Chief Economist at Care Ratings ,said, "There is a 50 per cent chance that the RBI will go in for a rate cut by 25 per cent in its June’19 policy to give an impetus to the lagging growth."