RBI faces five challenges in cutting rates. RBI Governor Urjit Patel Confronts on the issues and raised concerns that it would potentially risk inflation.
The Indian Consumers are expecting drop in loan rates which could probably help them in recovering from the crucial demonetisation phase .
But according to Urjit Patel , Reserve Bank of India’s governor who headed the monetary policy committee (MPC) declared few future challenges the banks are yet to face diminishing the hopes. The policy decision will be detailed on April 6, after the two-day meeting. The policy interest rates might remain unchanged as banks are flooded with cash soon after the demonetization drive. The main risk in loan rate reduction is that it would encourage consumers spending money after the rapid remonetisation which could potentially risk inflation.
Global issues like the current changes adopted by major central banks, the US dollar fluctuations, trade restricting policies, geopolitical tensions, and rise in oil and metal prices, will be debated by RBI’s rate-setting committee.
RBI might ask Banks for lowering lending rates more as their cost of funds is not up to the mark and credit growth has witnessed drastic fall at 63-year low of 4.4% until mid-March 2017.
“The MPC is poised to stay on hold at its bimonthly meeting on April 5-6. Having unexpectedly shifted at the prior meeting to neutral from accommodative, it would maintain its concerns about inflation,” foreign brokerage CLSA said in a recent note.
“However, it needs to offer greater granularity to enhance investors’ conviction in its ability to achieve the ambitious inflation target of 4% over five years,” it said.
The RBI course of action might depend on the following factors:
- Remonetisation and inflation
RBI governor Patel raised concerns on foreseen rise in inflation due to the rapid infusion of new Rs 500 and Rs 2,000 notes.
- RBI may want banks to lower rates further
Banks might lower rates given the fact that credit growth is heaving at 4%.
- Oil and metal prices stay firm
OPEC grouping have plans to extend the deal to cut oil output for six months more. India, being an oil importing nations might witness inflation with OPEC’s decision.
- Rupee versus Dollar
Once Trump assumed office, the dollar started profiting on expectations of tax cuts. Although, RBI is purposely keeping the rupee fixed against the dollar, the exchange rate may turn unstable and might lead to inflation.
- Unwinding easy money policy
Whilst US Federal Reserve decided to raise rates two more times after the 25 bps hike in March, the European Central Bank and Bank of Japan are also in the verse of adopting their easy money policies. In such a scenario, any rate cut by the RBI will minimize the interest rate discrepancy and accelerate Liquidity. This may weaken the rupee and rise inflation.