Rush hour and tougher questions ahead for both Mint Raod and banks

Piecemeal regulatory forbearance will not go far and tougher questions will be asked of both Mint Road and banks, reports Raghu Mohan.

“We must always remember that tough times never last; only tough people and tough institutions do,” said Reserve Bank of India (RBI) Governor Shaktikanta Das, when he announced a raft of measures to tackle the fallout of coronavirus (Covid-19) on the economy. It was a signal the days ahead will stretch both banks and Mint Road; so be prepared. Are we?

The asset quality of banks and the demands on their capital position due to its further deterioration must rank among the top concerns. The central bank has moved on the double to put in place a three-month moratorium on the servicing of term loans. But there has been no relook at income recognition and asset classification norms, the status of additional provisioning under the central bank’s June 7 circular, and the road ahead under the Insolvency and Bankruptcy Code (IBC) in these stressful times.

Says Divyanshu Pandey, Partner at J Sagar Associates, “There is good reason to give a three-month break for the timelines under the June 7 circular. An idea has been floated that the IBC process itself may be suspended for six months. A like thought process may be good for the June 7 circular as well.”

The merger of four sets of state-run banks, effective April 1, has led to a reset of a quarter of the banking system’s assets, and there is nothing to suggest that these entities will not require fresh capital down the line – and we have a handle on only their pre-Covid asset quality as on date. This holds true for private banks as well and may call for a rethink of their current capital structures.

Banks of future will be very different, says RBI governor Shaktikanta Das

Regulating the distinct segments of these banks would be a challenging task, said Shaktikanta Das.

Banks of the future would be extremely different from now, and regulating the distinct segments of these banks would be a challenging task, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Monday.

Therefore, an integrated framework for resolution of financial firms operating in India could be expected in the near future as that would add to the resilience of the financial system, Das said at the annual banking event of Mint.

Financial technology companies (fintechs) are posing challenges to the existing banks, but big technology companies, or BigTechs, are also entering the financial services industry in a significant way. Some BigTechs are depending on their data-network activities, while venturing into payments, money management, insurance, and lending activities.

“At present, financial services are only a small part of their business globally. But given their size and reach, their entry into financial services has potential to bring about the rapid transformation of the financial sector landscape,” Das said.

The entry of these firms have many potential benefits, and they can easily provide basic financial services to the masses at cheap cost, he said.

But the advent of fintechs and BigTechs are a challenge to banks, as well as banking regulators. While banks have to imbibe these new technology and business practices to remain competitive, banking regulators, on the other hand, Das said, “have to focus on achieving a balance between promoting innovation and applying a measured/proportional supervisory and regulatory framework.”

“All these mean that the future of banking will not be a continuation of the past.

We would see a very different banking sector, in terms of structure and business model, in the coming years,” the RBI governor said.

There would be different categories of banks. The first segment could be large Indian banks with domestic and international presence, for which merger of public sector banks are already taking place. The second segment could be mid-sized niche banks, and the third segment could be smaller private sector banks, small finance banks, regional rural banks, and co-operative banks. The fourth could be of digital players, which may act as service providers directly to customers or through banks by acting as their agents or associates.

More scope to cut interest rates, says RBI Governor Shaktikanta Das

Das said he hoped a recent trade deal between the United States and China would hold and not be reversed.

There is scope for cutting interest rates further and the central bank will use it when required after studying the growth and inflation data, Reserve Bank of India (RBI) Governor Shaktikanta Das said on Monday.

The monetary policy committee (MPC) surprised markets and analysts this month by holding rates steady after trimming the key interest rate by 135 basis points since the beginning of the current rate reduction cycle in February.

“While taking a pause we, very carefully and very definitely, said there is space for further monetary policy action, but the timing will have to be decided in a manner that its impact is optimum and its impact is maximised,” Das said at a conclave organised by the Times media group. Das said the markets were surprised when the committee started cutting rates in February but subsequently accepted that it was right in doing so. “And this time, the pause we have taken, I do hope that events will unfold in a manner which will prove that the MPC decision is right,” Das said.

He said both the government and the central bank had taken steps to help the economy recover but the outcome of events in the global economy would play a role.

Das said he hoped a recent trade deal between the United States and China would hold and not be reversed. The “Phase one” agreement reduces some US tariffs in exchange for a big jump in Chinese purchases.

“What is important in the current context is coordinated and timely action by all the advanced and emerging economies to revive growth,” he said.

“Growth is an issue of discussion in India and global growth is also an issue of discussion because that does impact. For a moment, I am not implying that the slowdown that we have seen in India is entirely due to global factors, but it does impact growth prospects for India.”

India’s economic growth slowed to 4.5 per cent in the July-September quarter.

Its weakest pace since 2013, this put pressure on Prime Minister Narendra Modi to speed up reforms as five rate cuts by the central bank have failed to boost investment. Das stressed the importance of communication for the markets and said the RBI had tried to be as clear and transparent as possible.

"Of course, communication should follow action and any communication should not be empty words, it should be followed by further action."...Read More

Das meets heads of PSBs, discusses transmission of rates, stressed assets

The meeting focused on credit flow to the 'productive sectors' which include micro, small and medium enterprises and non-banking financial companies.

The Reserve Bank of India (RBI) Governor Shaktikanta Das (pictured) on Wednesday met the chiefs of major public sector banks (PSBs) to get their feedback on transmission of rates. He also asked them to improve coordination for swift resolution of stressed assets.

The meeting focused on credit flow to the ‘productive sectors’ which include micro, small and medium enterprises and non-banking financial companies (NBFCs). The governor discussed the progress on deepening digital payments through focused outreach activities planned by banks to make identified districts in each state and Union Territory digitally enabled.

“There has been some improvement in the banking sector. It remains resilient, even though the current economic conditions may pose certain challenges,” said Das.

The governor urged banks to proactively tackle emerging challenges swiftly, particularly with regard to stressed asset resolution in a coordinated manner, the RBI said in a release.

Das has been meeting PSB chiefs at periodic intervals. The RBI has been nudging banks to pass on rate-cut benefits to consumers, so that there is sufficient credit offtake. He had a similar meeting with bank chiefs in October and discussed transmission and credit delivery to important sectors.

The monetary policy committee (MPC) has so far cut the benchmark policy rates by 135 basis points (bps) since February this year. Against a 135-bps cut by the MPC, in the credit market, the one-year median marginal cost of funds-based lending rate has declined by 49 bps and the weighted average lending rate on fresh rupee loans sanctioned by banks declined by 44 bps.

The MPC last week kept the policy rates unchanged, while it was anticipated that the committee would cut rates to boost growth. But the governor said they wanted to allow some more time for the previous rate cuts to play out. Therefore, the MPC decided to hit ‘pause’.

The governor in his statement during the monetary policy had said, “Going forward, transmission is expected to improve with the introduction of the external benchmark system, as most banks have linked their lending rates to the policy repo rate of the RBI.”

Business Standard

The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The Reserve Bank of India (RBI) on Thursday surprised the markets by exercising a “temporary pause” on its interest rate, as it waits to get more clarity on inflation and government measures in the upcoming Budget in February, before re-engaging with the Centre on the “national endeavour” of lifting growth.

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, voted unanimously to keep the policy repo rate unchanged at 5.15 per cent. The RBI, however, revised its outlook for growth and inflation. The central bank revised down its 2019-20 growth forecast to 5 per cent from 6.1 per cent in the October policy review. The inflation forecast for the second half of 2019-20 was revised up from 3.5-3.7 per cent to 5.1-4.7 per cent.

Gross domestic product (GDP) growth for the second quarter came in at 4.5 per cent, the lowest since March 2012-13, according to the official data released recently. But the RBI is not worried about the slowdown, Das said in the policy press conference.

“We are just waiting for greater clarity. The government has taken several measures and the RBI has also reduced its rates subsequently. Liquidity has been in surplus mode. We should also allow some more time for the rate cuts to play out to be reflected properly. Therefore, the MPC decided to take a temporary pause,” Das said responding to a media query.

“There is a case of looking through the current spike in headline inflation, which is mainly due to a rise in food inflation. Our calculations show that food inflation in Q4FY20 is supposed to remain very high,” he said, adding that prices would start easing from February.

The market and economists were expecting a sure cut in the policy review, considering the weak growth rate.

The 10-year bond yields jumped about 15 basis points (bps) to close at 6.613 per cent on Thursday. Prices drop as yields rise.

“I cannot remember the last time there has been such a resounding surprise as far as the RBI decision is concerned. It defies the expectation of the market and also the body language of the central bank over the last six months or so when it seemed amenable towards out-of-the-box thinking and being very proactive in terms of supporting growth,” said Taimur Baig, chief economist of DBS Group.

Business Standard

RBI likely to cut rates for sixth time this year, try help growth

RBI has delivered 135 basis points of interest-rate easing this year, but lenders have only transmitted a fraction of that to borrowers.

The Reserve Bank of India is set to deliver its sixth straight interest-rate cut Thursday, shrugging off a spike in inflation as it stays doggedly focused on supporting economic growth.

While all 34 economists surveyed by Bloomberg News as of Wednesday expect a reduction, the majority expect a quarter-point cut, with the rest expecting reductions of 15 basis points to 50 basis points. The RBI has cut borrowing costs by 135 basis points so far in 2019 to a nine-year low of 5.15%.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das, who completes one year in office next week, comes amid deepening concerns about growth, financial stability and weak public finances.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for:

Growth trajectory

The RBI has lowered its growth forecast for the current fiscal year four times already, with the latest revision in October pegging expansion at 6.1%. Data since then has shown gross domestic product expansion slowing to 4.5% in the July to September period, the weakest pace in more than six years.

“With no imminent signs of a turnaround, we expect the RBI to cut rates by 25 basis points at its December meeting,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. The July-September period saw economic slack deepen, with manufacturing contracting. A purchasing managers survey indicated that activity in the dominant services industry slowed during that period. With surveys for both manufacturing and services in November pointing to a rebound, it’s worth watching if and by how much the RBI will further lower its growth forecast.

Business Standard

It will need more than a rate cut to salvage India's sputtering economy

It wasn't too long ago that economic aspirations for India echoed China's. Now this young country of 1.4 billion people is looking more like Indonesia, Malaysia or the Philippines.

BS : Shaktikanta Das has one of the easiest jobs in central banking. He just has to keep doing what he's been doing since becoming governor of the Reserve Bank of India last December: cut interest rates. Fortunately, political will is on his side.

That’s an enviable state of affairs for a central banker these days. Just look at Federal Reserve Chairman Jerome Powell, who has become a constant target of President Donald Trump’s Twitter tirades. It’s also face-saving for Das that politics and economics are pointing in the same direction. He took up this post under a cloud of question marks about the RBI’s independence. Das’s immediate predecessor, Urjit Patel, quit abruptly almost a year ago, just as the government was ratcheting up pressure for the institution to hand over some of its reserves to free up fiscal spending.

The troubling state of Asia's third-largest economy makes Das's task uncomplicated. The country's pace of economic growth is slowing dramatically; government numbers due late Friday may well show the expansion slipped below 5 per cent last quarter, the weakest pace since gross domestic product figures were reconfigured in 2012. Last year, the nation was churning out GDP numbers with an 8 in front of them. Many big economies have been slowing, but it’s hard to think of another where growth has come down to earth so quickly.

For Das to even contemplate taking his foot off the monetary pedal now would be a mistake. He should look past the recent uptick in inflation last month, largely attributed to vegetables such as onions, a staple of Indian cooking. Those price gains helped push the measure beyond the RBI's 4 per cent medium-term target. More important is the slide in core inflation, which strips out volatile commodity prices. This points to a demand problem in the economy, as my Bloomberg Opinion colleague Andy Mukherjee wrote here.

Das says policymakers will keep cutting rates until growth revives. The five reductions he’s overseen haven’t given the economy back its groove; so the mission is clear going into next week’s meeting, when the central bank is expected to cut again. His global peers may have done well to adopt the same approach. It's clear from the Fed’s retreat that the hikes in 2018 went too far in the face of anemic inflation. The European Central Bank had barely curtailed quantitative easing before it had to start all over again.

Lest Das be tempted to sail through, there's the iceberg of India’s banking industry to consider, which is saddled with one of the world's most dangerous loads of bad debt. The trouble is, about 60 per cent of the financial system is controlled by state-run banks that report to the government, so Das’s ability to influence them is constrained. At some point he may well have to challenge entrenched political interests.

Slowdown to bad debts: Shaktikanta Das's balancing act is becoming tougher

As the economy slows, the Reserve Bank governor will find it tough to keep all the balls in the air in the many roles he performs.

Soon after taking over as India’s central bank governor almost a year ago, Shaktikanta Das decorated his 18th floor office overlooking the Arabian Sea with two statues of Lord Jagannath, a form of the Hindu god Vishnu.

Revered in Das’s native Odisha state, Jagannath is depicted with round, lidless eyes that are always watching over the welfare of devotees. It’s an appropriate adornment.

Das, overseeing what was until recently the world’s fastest-growing major economy, has worked tirelessly to restore relations with the government after a bitter public spat led his predecessor Urjit Patel to quit. Colleagues say Das usually tucks papers under his arms at the end of the work day to continue plugging away from home.

He’s paid a hefty dividend to the finance ministry, swung into stimulus mode and eased up on bank lending restrictions—all of which Patel resisted in the face of government pressure. But there’s still much to do: the economy is losing steam on many fronts, the banking sector remains saddled with one of the world’s worst bad-debt loads and the government’s fiscal targets are slipping by the day.

Insiders say Das has turned around the mood in the bank’s Mumbai headquarters with an affable, plain-spoken approach. As one official said: He listens to everyone and then sticks to his own decision.

Among the RBI rank and file, the more academically-decorated predecessors of Patel and Raghuram Rajan were considered outsiders due to their long stints in American academia. Long-timers were put offside as in-house talent was often bypassed in senior appointments. Not with Das: in the job posting for a deputy in-charge of monetary policy, at least 25 years of government experience within India tops the priority list among requirements for the role.

Rajan and Patel were contrasting personalities—Rajan the rockstar of global central banking and Patel reclusive both inside and outside the bank. Silver-haired Das strikes a balance. He has his own Twitter account and is more open to the media, giving interviews to local and foreign media including Bloomberg News. But he hasn’t taken to the global stage in the way Rajan did, such as when he led criticism of the Federal Reserve in 2014 for not taking into account the spillovers of its policies on emerging markets.

Business Standard

Monetary policy review: RBI set to cut rate. Question is by how much?

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das.

Business Standard : The Reserve Bank of India is set to deliver a fifth straight interest rate cut Friday, although economists are unsure of the quantum following an unconventional 35 basis-point easing last time.

While all 39 economists surveyed by Bloomberg News expect a reduction, their forecasts range from 15 basis points to 40 basis points. The RBI has lowered borrowing costs to a nine-year low of 5.4% through 110 basis points of easing so far in 2019.

The meeting of the six-member Monetary Policy Committee led by Governor Shaktikanta Das comes amid growing concerns about India’s banking and financial sector, and just weeks after Prime Minister Narendra Modi eased fiscal levers by announcing a surprise $20 billion tax break for companies.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das.

Here’s a look at what else to watch out for:

Growth

The RBI has lowered its growth forecast for the current fiscal year three times already, with the latest revision in August pegging growth at 6.9%. Data since has shown gross domestic product expansion slowing to 5% in the June quarter, the weakest pace in six years. That may prompt the central bank to revisit the numbers once again.

The latest growth numbers “look much worse,” Das said recently, referring to RBI’s projection of 5.8% expansion in the April-June period. “There is a slowdown, which was evident and at the last MPC we very clearly said that growth seems to be losing traction and therefore, growth is a matter of highest priority.”

Inflation

A recent spike in onion prices notwithstanding, headline inflation has stayed below the RBI’s 4% medium-term target for 13 straight months.

Food and beverage prices, which account for about half of the consumer price basket, have climbed on the back of a surge in urban food inflation. Das has said gains in food inflation are cyclical and there won’t be much pressure on prices, given monsoon rains appear to be normal.

Core inflation, which strips out volatile food and fuel prices, has been decelerating amid subdued demand. That will give the central bank ample space to keep policy accommodative in the coming months.

Monetary policy review: Another rate cut may not help Indian economy

The larger problem here is that government finances are already in a hole; that would be a problem even if the tax cut were the best-designed in history.

Business Standard : It’s almost universally expected in India that the central bank’s monetary policy committee will lower interest rates this week. Many expect it to keep cutting until the policy rate hits 5 per cent by the end of the year; it was 6 per cent in June, and the committee cut it by an unexpected 0.35 percentage points in its last meeting to bring it down to 5.4 per cent. The arguments for a cut are manifold: The Indian economy is clearly spluttering, with growth coming in at a shocking 5 per cent in the last quarter for which data is available; consumer price inflation stands at 3.2 per cent, well below the Reserve Bank of India’s mid-point target of 4 per cent; and industry is loudly complaining that high real rates are depressing investment.

Even the hawkish monetary policy committee, which critics complain has consistently over-estimated inflation in the past, is unlikely to be able to ignore that combination of factors. RBI Governor Shaktikanta Das told the Bloomberg India Economic Forum last month that “there’s room for a rate cut, especially when growth has slowed down.” The bond market has already been given reason to cheer this week, after the government kept its target for borrowing in the second half of the financial year constant, at Rs. 2.7 trillion.

But the RBI would be wise to be cautious. The government in New Delhi won reelection in May by throwing money at the electorate, particularly rural voters. More recently, panicked by the sharp slowdown in growth, it has responded with fiscal measures that are likely to stress its finances, including a big cut in corporate income tax rates last month (though the eventual fiscal stress of that cut might be less than originally feared, given that exemptions are also being phased out).

The larger problem here is that government finances are already in a hole; that would be a problem even if the tax cut were the best-designed in history. The budget India’s finance minister presented to Parliament in July was swiftly undermined when a senior government adviser pointed out that the tax receipts seemed outdated -- and that, in fact, revenues in the last financial year were Rs. 1.7 trillion less than advertised.

In addition, the tech giant also showcased a foldable Surface Duo phone that runs on Android.

The company said the two screens would make users more productive.

RBI faces calls to do more than just one rate cut amid economic slowdown

Finance Minister Nirmala Sitharaman has ratcheted up pressure on the six-member monetary policy committee for a 'significant cut' to lift economic growth from a five-year low.

Business Standard : India's central bank is poised to deliver its fourth successive quarter-point interest rate cut on Wednesday, amid calls from investors and the government for further easing as a slowdown gripping the economy becomes more pervasive.

The Reserve Bank of India will lower the benchmark repurchase rate by 25 basis points to 5.5 per cent, according to almost all of the 36 economists surveyed by Bloomberg.

Swap markets are pricing in at least another 50 basis points of reductions before the end of 2019.

Finance Minister Nirmala Sitharaman has ratcheted up pressure on the six-member monetary policy committee for a "significant cut" to lift economic growth from a five-year low.

Inflation that's stayed below the central bank's 4 per cent medium-term target for 11 months in a row and the Federal Reserve's first rate cut since the financial crisis allows room to retain the policy makers' easing bias.

ALSO READ: Monetary policy review: RBI may cut rate, but commentary will be cautious

A quarter-point cut will take the benchmark rate to the lowest since April 2010. With price pressures anchored, the central bank may have the leeway to keep rates lower for longer.

"We expect 75 basis points of additional rate cuts spread over August, the fourth quarter of 2019 and the first quarter of 2020, taking the repo rate to 5 per cent by March 2020," said Pranjul Bhandari, chief India economist at HSBC Holdings Plc in Mumbai. The headline inflation will stay below the RBI's medium-term target for the "foreseeable future" due to a lack of underlying price pressures across sectors, she said.

RBI set to cut interest rate in August for the fourth time in a row: Report

They are going to cut rates in August and again later, mainly due to low growth and weak inflation, said an economist.

The Reserve Bank of India is set to cut interest rates in August for the fourth meeting in a row, according to a Reuters poll of economists, a majority of whom said risks to their already-modest growth forecasts were skewed more to the downside.

If the RBI does cut rates next month, it will be the most aggressive amongst dovish central banks in Asia. The last time the RBI delivered so many back-to-back cuts was after the global financial crisis over a decade ago, when most major central banks went on a cutting spree to revive economic growth.

Almost 80 per cent of 66 economists in the July 17-24 poll expected the RBI to cut its benchmark repo rate by 25 basis points to 5.50 per cent at the Aug. 7 meeting. Three respondents predicted a 50 basis points cut and the remaining 10 forecast policy on hold.

"It is baked in the cake. They are going to cut rates in August and again later, mainly due to low growth and weak inflation," said Gareth Leather, senior Asia economist at Capital Economics.

India's inflation has remained below the central bank's medium-term target of 4 per cent for almost a year and is not expected to rise significantly above that until at least 2021. The poll's findings support RBI Governor Shaktikanta Das' recent comments about the central bank's accommodative stance and suggests further easing.

Indeed, following next month's expected move, the next rate cut is seen in early 2020, after which the RBI is forecast to keep rates on hold at 5.25 per cent through to end-2020.

Yet despite three interest rate cuts this year and expectations for more, India's growth outlook was downgraded in the latest poll compared to the previous quarterly economic survey in April.

Business Standard

RBI could make it three cuts in a row on subdued growth, benign inflation

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Shaktikanta Das.

The Reserve Bank of India is likely to cement its position as Asia’s most dovish central bank with a third straight interest-rate cut Thursday.

Keep Reading : Business Standard

The six-member monetary policy committee led by Governor Shaktikanta Das will reduce the repurchase rate by 25 basis points to 5.75% on Thursday, say 31 of 43 economists surveyed by Bloomberg, while three are penciling in a 50 basis points cut. The RBI may also switch its stance to accommodative from neutral, given that expectations are growing for the Federal Reserve to slash rates this year.

Inflation that’s stayed close to the lower end of RBI’s 2-6% band for six months has given policy makers room to support economic growth. India is among central banks across Asia shifting to looser monetary policy to boost their economies amid risks from the U.S.-China trade war. Philippines, Malaysia and New Zealand eased last month, while Australia cut interest rates this week for the first time in almost three years.

The policy decision will be announced at 11:45 a.m. in Mumbai, followed by a press conference 15 minutes later by Das. Here’s a look at what else to watch out for in the decision that comes weeks before the new government’s annual budget on July 5:

Subdued Growth

Gross domestic product growth slowed to a five-year low of 5.8% in the first three months of the year. Investment has been subdued and early indicators from auto sales to air travel show consumption -- which contributes more than 60% to GDP -- has waned amid a crisis in the shadow banking sector that’s curbed lending.

At its last policy meeting, the central bank cut its GDP forecast for the current fiscal year to 7.2% from 7.4%. Still, the reading depends on how the crucial monsoon season pans out. For now, the southwest monsoon, which waters more than half of India’s farmland between June and September, is expected to bring normal rainfall.

Economists have already trimmed GDP forecasts to 7.1% for fiscal 2020 in the latest Bloomberg survey from 7.2% previously.

“The muted growth seals the case for more rate cuts,” said Upasna Bhardwaj, an economist at Kotak Mahindra Bank Ltd. in Mumbai. “We maintain our expectation of 25 basis point rate cuts in June and August —- though an outside chance of a 50 basis-point rate cut in June itself could build up.”

5 factors that shaped RBI's inflation forecast and 6 key risks

Besides a normal monsoon, the inflation path, according to the RBI, will be shaped by five factors.

The Reserve Bank of India (RBI) slashed repo rate by 25 basis points (bps) to 6 per cent in its First bi-monthly Monetary Policy Statement for financial year 2019-20 (FY20). The central bank, however, has assumed the monsoon to be normal this year.

Recently, private weather forecaster Skymet had forecast below-normal monsoon rains during June-September, with a 15 per cent chance of a drought.

Consumer price inflation (CPI) projection, as a result, has been revised downwards to 2.4 per cent in Q4FY19, 2.9-3 per cent in H1FY20 and 3.5-3.8 per cent in H2FY20, with risks broadly balanced.

"The RBI has adopted a very sensible and pragmatic approach by cutting the repo rate by 0.25 per cent while keeping the policy stance neutral. It takes cognizance of the likelihood or potential for inflationary pressures emerging from food prices and fuel prices and also fiscal pressures from the large government borrowing program," said Dr. Joseph Thomas, Head Research- Emkay Wealth Management.

“RBI has held on to its gradualist approach in choosing to cut REPO rate by 25bps and maintaining neutral stance. The two key risk events for inflation trend in the year ahead - monsoons and elections, cloud the near term inflation outlook and warrant continued data dependency. The forward guidance for growth and inflation remains mixed and indicate shallow cuts here and there and not a cut cycle for now,” added Rajni Thakur, an economist at RBL Bank.

Besides a normal monsoon, the inflation path, according to the RBI, will be shaped by the following five factors:

First, low food inflation during January-February will have a bearing on the near-term inflation outlook, the RBI said.

Second, the fall in the fuel group inflation witnessed at the time of the February policy has become accentuated.

Third, CPI inflation excluding food and fuel in February was lower than expected, which has imparted some downward bias to headline inflation.

Fourth, international crude oil prices have increased by around 10 per cent since the last policy.

Fifth, inflation expectations of households as well as input and output price expectations of producers polled in the Reserve Bank’s surveys have further moderated.

Business Standard

Despite RBI prod, banks unwilling to cut lending rates as deposits dwindle

Shaktikanta Das, the new RBI governor, has been trying to nudge bankers to lower lending rates, holding meetings with bank chiefs last month to discuss the monetary policy transmission.

Business Standard : Indian lenders haven’t fully passed on the central bank’s latest interest rate cut to borrowers, pressuring the monetary authority to loosen policy even more to support economic growth.

A mismatch between deposits and credit growth, and competition from the government for small-savings mean banks face a high cost of capital, limiting their ability to transmit monetary policy easing. Bankers say the Reserve Bank of India’s 25 basis-point reduction in the repurchase rate to 6.25 percent in February was a start, but was probably too little to have any impact on lending rates just yet.

Latest data from the central bank shows the main overnight lending rate offered by commercial banks has been sticky in a range of 8.15 percent to 8.55 percent since the beginning of the year. Most banks have trimmed lending rates by a ‘token’ 10 basis points, said Ashutosh Khajuria, chief financial officer at Federal Bank Ltd. in Mumbai, adding that the RBI needs to move by a bigger-than-usual 50 basis points to spur lending.

“If it is a 50 basis points cut, it will be an accelerated transmission,” Khajuria said. “If inflation behaves the way it has been,” rates will certainly go down in the first quarter of the next financial year starting April.

Subdued Inflation

Calls for rate cuts have been building, given benign inflation and weak demand. Inflation has been subdued at about 2 percent, much lower than the central bank’s medium-term target of 4 percent.

Shaktikanta Das, the new RBI governor, has been trying to nudge bankers to lower lending rates, holding meetings with bank chiefs last month to discuss the monetary policy transmission. In India, rate adjustments take about six to nine months to work its way through the economy.

Bankers remain cautious though and “are not willing to cut rates as deposits and household financial savings are at historical lows,” said Prachi Mishra, chief India economist at Goldman Sachs India Securities. “Even while policy rates are down, the rates paid by the government on small savings are significantly higher than bank deposit rates.”

Savings programs offered by the government through post offices return between 7 percent and 8 percent annually along with tax benefits, while a one-year time deposit with the State Bank of India, the country’s largest bank, earns an interest of 6.9 percent.