All eyes are set on Reserve Bank of India’s (RBI) monetary policy on September 30. In his 12 months in office Governor Rajan has driven home his determination to cut inflation first to 8 percent and then to 6 percent. So with inflation still at 7.8 percent, the answer to a question will he cut rates was easy and as expected.
It was a resounding, unanimous “no” from all CNBC-TV18’s poll respondents. But there the unanimity ended. When asked when the first rate cut will come, it was deeply divided response. Twenty percent said in 2014; 10 percent said first half of 2015, 40 percent said in the June-September quarter of 2015. But surprisingly, 30 percent said no cut at all till October 2015 i.e. for a year from now.
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Likewise when we asked how much will rates fall in a year; 20 percent said 25 bps; 50 percent said 50 bps; while 30 percent said no rate cut at all for a year. By far all those who were polled said they will watch the governor’s stance since in any case no action is expected. Seventy percent said his tone will be as hawkish as in August, but 30 percent said he will tone down his hawkishness.
A Prasanna, Chief Economist at ICICI Securities and others also said the governor will increasingly emphasize real rates i.e. RBI’s policy rate minus inflation. Currently, RBI’s policy rate is 8 percent, and inflation is also around 8 percent. So, 50 percent of the respondents said RBI will begin stressing on real rates.
But economists were divided on what is the appropriate real rate for India: 50 percent said 1 percent; 20 percent said 2 percent; another 20 percent didn’t reply and 10 percent said real rates should depend on phase of India’s economic growth.
When asked will RBI cut the SLR, the percentage of their deposits that banks must invest in GSECs, 60 percent said yes, RBI will bring it down by another 50 basis points – after all the governor has declared his intent that government should appropriate less and less from banks. Fourty percent said no; governor has done enough on SLR for now.
Banks initially were allowed not to mark to market whatever they bought for SLR requirement. But over time, SLR has come down to 22 percent from 25 percent and yet they don’t mark-to-market 24 percent of their GSEC investments, which is called or held-to-maturity (HTM) category. Sixty percent of the respondents said RBI will cut this by 50 bps to 23.5 percent and 40 percent said RBI will leave it alone.
On one issue all were agreed: The governor won’t tinker with the growth forecast. He will leave it alone at 5.5 percent. No rate change; no growth change. A no change policy, but not a non-event policy.