MARKETS AWAIT 2nd JUNE, 11 AM - ALL EYES ONLY ON RBI

By Ruma Dubey

So the big day is tomorrow and the Indian stock markets are in a “waiting” mode. The lackluster mood on Dalal Street today saps out whatever little energy the heat has already not sapped out.

All are waiting for 11 AM tomorrow – will he or won’t he is the big question.

If Rajan were to look at the GDP numbers of Friday, he does not have too much reason to reduce rates. The growth rate of 7.5% in Q1FY16 shows that the economy is doing well; so the alarm bells to bring down rates to spur growth is an argument which will not get any support. But yes, if he decides to look at the dismal corporate earnings on companies announced till now in Q1, there is all reason to believe that growth is staggering. Domestic as well as export demand is on the wane and if he wants to spike up demand, he needs to give the incentive of lower interest rates. At the same time, we need to understand that this GDP is based on a new method and there is talk of major discrepancies. 

And if Rajan were to look at only inflation? CPI, the gauge which RBI uses to make all important macro decisions, is actually doing well. The CPI for April’15 came in at a low of 4.87% v/s 8.48% (YoY)  and 5.25% in March’15 and this is well within the RBI’s target of 6% for January’16.

The thing is –one does not know if Mr.Rajan himself knows this or not but almost all have decided that he will cut interest rate by 25 bps tomorrow. The market has already discounted for this fact. But this is again a very strange thing; if the rate cut is only 25 bps, the markets will shrug its shoulders, stifle a yawn and probably ask, “so what’s new?” So it will not react much to a 25 bps rate cut. But if that 25 bps cut, to which it does not have any inclination to react cut does not come, it will react with a fall. Do the expected- no reaction and fall below expectation – react with a fall and a 50 bps rate cut – now that is day dreaming!

Why we feel nothing more than 25 bps? Well, inflation might be tamed and will continue to look good, thanks mainly to the base effect. But one has to wait and see the effect of the unseasonal rains which has already led to spike up of price of pulses by 30-40%. Fuel prices have been hiked and crude has also started showing signs of some rise. Rupee, well, one can say is stable but this is again thanks to RBI; if it lets go, wonder where the rupee will settle. Thus based on these facts, maybe a 25 bps to bring in some cheer but would be too much optimism to expect more than that.

At the previous policy, on 7^th April, RBI had laid down 4 conditions to be met before it goes for a rate cut:

1. RBI will await the transmission by banks of its front-loaded rate reductions in January and February into their lending rates.
2. Developments in sectoral prices, especially those of food, will be monitored, as will the effects of recent weather disturbances and the likely strength of the monsoon, as the RBI stays vigilant to any threats to the disinflation that is underway. The Reserve Bank will look through both seasonal as well as base effects.
3. The RBI will look to a continuation and even acceleration of policy efforts to unclog the supply response so as to make available key inputs such as power and land. Further progress on repurposing of public spending from poorly targeted subsidies towards public investment and on reducing the pipeline of stalled investment will also be helpful in containing supply constraints and creating room for monetary accommodation.
4. Finally, the RBI will watch for signs of normalisation of the US monetary policy, though it anticipates India is better buffered against likely volatility than in the past.

The first condition – banks have transmitted rate cuts.

US Fed rate hike – that will come maybe much later in the year than mid-year; so some relief there.

The other two conditions – moderation of inflation and acceleration of policy efforts; these are yet to really happen. Yes, inflation is down but we have to see the effect of unseasonal rains and the much feared El Nino. And regarding acceleration of policy measures – nothing much has happened till now.

So 50% of the conditions have been met while the other 50% remains up in the air. Thus there is really no reason for a 50 bps rate cut and 25 bps rate cut, if it comes, will be purely to keep the spirit of investment alive.

Well, we wait for 11 AM …..