Will RBI Credit Policy bring Cheers to Borrowers of India?

As the Reserve Bank of India (RBI) meets for its October session there will be a change of guard. The new governor Urjit Patel, who replaced Rajan and the Monetary Policy Committee, will take the call on the rates.

The 3 member panel of Monetary Policy Committee has been appointed by the government. It consists of Chetan Ghate, a professor from the Indian Statistical Institute, Pami Dua of the Delhi School of Economics and finally Ravindra Dholakia of the Indian Institute of Management, Ahmedabad. They will bring in diversified set of beliefs which is expected elevate the quality of conversation at MPC meets. This distinguished panel holds a great potential to carry the responsibility of controlling inflation. The MPC is a perfect combination of academics, practitioner, and one with corporate experience with no government representative.

As result of a decent monsoon and inflation benign, there seems to be a clear cut case of rate cut. But there is a lot more to what it looks like apparently.

Firstly, the FED have been very vocal of raising interest rates once in 2016, probably in December as the U.S presidential election is in the month of November.

Secondly, the redemption of FCNR deposit over the next few months can put pressure on the Indian currency, in case, crude oil is pushed higher as we have noticed happening during winter.

These two points will play well in the back of the mind of the newly appointed RBI governor Urjit Patel during the meet of 4th October.

The MPC debates may go beyond inflation in arriving at the monetary policy decision as expertise on the impact of foreign exchange inflows and developments in the international financial markets would also be a point.

The implementation of GST on the 1st of April 2017 will be another factor he has to consider as GST has brought inflation in the countries where it has been introduced earlier.

Overall there is a very positive chance of a rate cut to happen during the 6th December meet of the RBI. By that time the new team of RBI would have settled and would have a better picture of inflation going forward in the next year as the base rate of GST would have been decided by then.

Market reaction

Markets have been euphoric and hopeful for a rate cut, though banking stocks have not performed too well. The Bank Nifty share price is currently trading at 20,062.40 which is an underperformance by the index when compared to the NSE benchmark Index Nifty. FIIs and DIIs have been buyers in the equity markets and even though nifty forward P/E multiple is 18 the markets have the liquidity flow to move higher if RBI joins the party.

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