All Eyes set on Oct 4th RBI Monetary Policy Verdict

It was only recently that the New RBI Governor Urjit Patel took over the baton from Raghuram Rajan with some priority areas at hand for his immediate attention. The inflation was needed to be put on track immediately as the market are expecting softer policy rates from him as the commodity price cycle turns favorable with the better rainfall. Although the role of RBI Governor has lessened with the formation of the monetary policy committee, still, the market and every stakeholder are keen to assess his plans on the two key aspects – inflation expectation and better credit delivery. And now the date is set for the verdict. Doing it in FOMC style: RBI is walking the Federal Open Market Committee (FOMC) way and hence a six member Monetary Policy Committee will be deliberating on the Monetary Policy before delivering their decision. The RBI committee will meet on October 3rd and 4th and will let the market know about their decision at 2:30 PM on 4th, just an hour before the Benchmark Indices Nifty and Sensex closes for the day’s trade. But there will still be enough time for the bonds and currency markets react to the decision. RBI is right on the path of FOMC, including the final say which no longer stays with the Governor and who is just one of the six members, albeit with a casting vote in case of a tie in member’s vote. The only difference is FOMC meet once in a quarter while RBI meets twice, which is subject to change. Expectations: Experts are viewing some room for the rate cuts and liquidity ease as October will be seeing the FCNR (Foreign Currency Non-Resident) redemption putting some stress on the Banking system. In the last four months RBI has injected almost Rs. 1 lakh crore for offsetting FCNR redemption issue. Moreover, there is a probability that RBI might cut the rates after the good rainfall and food prices coming down. Some experts hold the view that the expectation of rate cut in the fourth bi-monthly Monetary Policy Review on October 4th is a bit premature. Although the inflation remains the single most important factor for the rate cut, the committee may just want to wait a little longer before resorting to any monetary easing. India Ratings and Research report say that the scope of rate cut looks skewed towards the December Policy Review rather than in October. ICRA and Neeraj Gambhir of Nomura Capital sides with India rating on the rate cut, expecting the RBI to leave the rate cut in October as it awaits additional data, and defer a 25 basis point rate cut in the December review, in spite of the lag in transmission of policy easing to Bank lending rates.

On the other hand, the top Indian CEOs want RBI to take a dovish stance and cut the interest rates in October so that it could help revive the falling investments by the private sector. The promoters of many large conglomerates stated that the falling capital expenditure by India Inc is worrying. It was mainly due to the high-interest rates by RBI under the previous Governor. The high rates also brought private sector capex to a grinding halt. All eyes are set on the new Governor, hoping there will be change on the ground. The chairman of HCC said that Urjit Patel has to balance between the Inflation and growth and the chairman of Videocon group is hoping that the Governor reduces the interest rate and also takes measures for reducing the inflation.

The Poll: A poll by CNBC-TV18 says that although the market is hoping for a rate cut, around 65% are not expecting any action on the key repo rate in October. Almost 95% of the experts are not expecting any action on CRR. For the next review, although, 50% are expecting 25 bps rate cut, 45% are expecting 50 bps while 5% are eyeing 75 bps rate cut. Majority experts are expecting RBI to maintain GVA growth projects of 7.6% and maintain the CPI inflation target for January 2017 at 5%. 95% experts are expecting RBI to continue with neutral liquidity and persist with 1.5% real positive rate of interest. 35% said RBI would do away with the concept of targeting any real rate of interest. 35% of them are expecting the Governor to ease the fight against the bad loans and give the breather to Banks while 55% are expecting RBI to continue the fight. There is a mixed expectation regarding Urjit Patel’s stance. Some are expecting him to be dovish, and some are counting on him to be neutral while other are betting him to be hawkish.

Will Indo-Pak tension affect RBI’s Monetary Policy? The Surgical Strike by India has been in the limelight. The rising tension between the countries is expected to become a topic of deliberation in the Monetary Policy Committee discussion. A CARE Rating report has indicated that if the tension continues, then RBI may give the rate cuts a serious thought, which, in normal circumstances in very unlikely.

In the wake of the Surgical Strike and on the seriousness of battle and the reaction of the market, chances are RBI will consider it on a more serious note.

Will GST and 7th pay commission spoil the party? Urjit Patel has dispelled fears of high inflation due to GST implementation. He stated that after the implementation of GST, prices of many items will fall, thereby helping in partially offsetting the increase in prices of other consumption items. He also said that the impact of the full implementation of the 7th Central pay commission recommendations on allowances might be softened if the weight assigned to the public sector housing and the rent in the calculation of the CPI is lowered.

Conclusion: Whatever may come of the RBI’s Monetary Policy Review on October 4th, Bank Nifty is going to be very sensitive to it. Nifty might react and recover in some time after the delivery of the verdict. Nonetheless, the market, investors and every individual are keeping a keen eye on the meet.