RBI under the new head
reduced the repo rate by 0.25% in its review meeting held on 4th
October’2016. The rate cut was in line with the market expectations. The CPI
inflation came down to near 5% in August’ 2016 and Government is likely to achieve
inflation target of around 5% for the year end March 2017. There is no doubt
that monsoon this year is very good and again with record food grain production
the inflation will soften further. But I think there are number of factors and
events which are likely to unfold in coming two months which are very important
for us. I feel RBI should have used pause button this time. I would like to
highlight the points which are very important for us in coming days.
1) US President Election
will be held in November’2016 and the result is very important for us. It’s
early to predict who is ahead or win as in last minute anything can happen. The result is important because the US government
plays a very important role in the world economy. Not only India but the entire
world will be watching the outcome very closely.
2) The big FCNR (Foreign
Currency non resident) deposit redemption is due from this month amounting to
$26 billion. Even Banks and RBI may be well prepared for this there is no
reason to take chance till that happens smoothly. This is one of the biggest
redemption in debt since last many years and market is curious to know the
impact of this.
3) The crude oil price
again has crossed $50 per barrel. OPEC members also met last month to cut the
production but did not come to consensus. But any such move to cut the
production can lead to increase in the crude price. Government recently
increased the price of petrol and diesel and may have to increase again if
crude price goes up. Increase in diesel price will put pressure on inflation.
4) It is now certain
that federal bank will increase the rate in the month of December, which may
have negative impact on the emerging markets like India. Any large withdrawal from
India can weaken the rupee further which is not good for our economy.
5) It is also important
to take cautious stand because of the tension at the border. The recent surgical strike by our Army can
also provoke the Pakistan to take some unwanted actions. I do not have doubt about the capabilities of
our Army but any serious situation can hit our economy badly.
6) Last but not the
least, RBI is reducing the interest rate so that the money is available at
cheaper rate which help corporate to improve their balance sheets. But we
should not forget that banks have not fully transferred the earlier repo cut of
1.50% till date. Banks have maximum passed 80 paisa and still there is room to
pass the balance 70 paisa so that end user benefits. I think RBI should also
have considered this before reducing the rate further.
Across world the
deposit rates are NIL and in some countries even the rates are negative. Indian
government may also be eyeing that. But in Indian context we should be cautious
as the large number of aged people survives on interest income. In the absence
of good immediate pension fund options, senior citizens are likely to suffer if
rates drop further. Government and RBI should not only aim at high growth but
also look at ground reality.
This article first appeared at indianotes.com on 8th October'2016
http://www.indianotes.com/Analysis/RBI-could-have-waited-for-rate-cut/204289/2/T
