Arab Today, arab today investors bet on loser rbi monetary policy
Last Updated : GMT 02:27:44
Arab Today, arab today
Arab Today, arab today

Investors bet on loser RBI monetary policy

Arab Today, arab today

Arab Today, arab today Investors bet on loser RBI monetary policy

New Delhi - Arabstoday

Investors are betting the Reserve Bank of India (RBI) will loosen monetary policy on Monday sufficiently enough to bring down borrowing costs, spur consumer spending and help revive economic growth that has slumped to the lowest in nine years. To what extent the central bank lives up to those expectations will set the tone for the stock market this week, with Greece’s election results also having an impact on investor sentiment. A drop in world oil prices and moderate core inflation should give the RBI elbow room to lower rates, but high wholesale price inflation — 7.55 per cent in May, pressured by food and fuel prices — is a dampener and will keep a restraining hand on the central bank. The expectation on the street is for a quarter-point cut in the repo rate to 7.75 per cent, along with a 25-50 basis point reduction in the cash reserve ratio (CRR), which would give banks access to as much as Rs320 billion (Dh21.2 billion) of immobilised funds and enable a smoother transmission of policy. The RBI had slashed rates by a bigger-than-expected 50 basis points in April, but this failed to percolate down to the retail borrower as commercial banks did not follow through saying that without a cut in the CRR that stands at 4.75 per cent it would not be possible to lower lending rates. Pratip Chaudhuri, chairman of State Bank of India, the country’s largest bank, said he expected a one percentage point reduction in the CRR, adding it would also improve profitability of banks. “We have made a request. It will recharge a lot of investor sentiments, the economy and also stock markets,” he told reporters. The top-30 Sensex rose 1.4 per cent last week to its highest close in six weeks at 16,949.83 in anticipation of lower rates, but it would be difficult to sustain the gains if the Greece election results put in jeopardy bailout terms for the debt-stricken country and unravel global investor confidence. The government, which controls the State Bank, threw its weight behind Chaudhuri. “If there is 1 per cent CRR cut, it will release [Rs] 60,000 crore [Rs600 billion] in the system which will help banks to earn [Rs] 5,000 crore [Rs50 billion] of additional profit,” Financial Services Secretary D.K. Mittal said. He conceded it was the RBI’s call, but added the government would welcome a cut. However, private-sector economists are sceptical about the effectiveness of looser monetary policy, and warn it could prove counter-productive unless New Delhi woke up from its slumber and kick-started economic reforms and decision-making — seen as the primary reason for the sharp slowdown. “Boosting aggregate demand via interest rate cuts rather than enhancing aggregate supply will only worsen the inflationary pressures in the near term,” Rajeev Malek, the Singapore-based economist at CLSA, noted. “Even if an investment upturn adds to aggregate supply, it does so with a lag. In any case, boosting aggregate demand from, say, higher investment should be matched by shrinking the fiscal overhang and moderating consumption growth. In the absence of such finely balanced recalibration — itself a challenge — India will suffer a more protracted macro adjustment.” Industrial production in April almost stalled, with capital goods output contracting 16.3 per cent, while GDP grew just 5.3 per cent in the March quarter — a far cry from 9.2 per cent rise in the same period a year earlier. HSBC also believes a repo rate cut would be ineffective and the “wrong medicine” to boost growth. “We think deeper structural reforms are needed instead, and soon,” it said in a note on Friday. Indeed India runs the risk of losing its investment-grade rating because of factors such as slowing GDP growth and political roadblocks to economic policymaking, Standard and Poor’s warned last week. “Setbacks or reversals in India’s path toward a more liberal economy could hurt its long-term growth prospects and, therefore, its credit quality,” said Joydeep Mukerji, credit analyst at the rating agency. “The combination of a weakening political context for further reform, along with economic deceleration, raises the risk that the government may take modest steps backward away from economic liberalisation in the event of unexpected economic shocks,” he said in a statement. India has the lowest rating — one notch above junk status — among its peers such as Brazil, Russia and China that make up the so-called BRIC economies. From gulfnews

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