Dear All,
Almost no one expects Reserve Bank of India governor Raghuram Rajan to reduce interest rates at the September 30 monetary policy announcement despite all the recent good news. In the year since he took over last September, Rajan has made amply clear he's not swayed by sentiment and that, as the governor said in August, he's determined to quell inflation "once and for all".
This recent good news has included Standard & Poor's upgrading its outlook on India's rating to stable from negative and finance minister Arun Jaitley cutting the government's borrowing target for the fiscal year by Rs 8,000 crore as revenue picks up on the back of a reviving economy and in anticipation of a blockbuster asset-sale programme, besides other money expected to come into the exchequer's coffers and improve government finances.
Rajan has said that he'll keep interest rates unchanged until there are convincing signs of inflation falling to 6% by January 2016. Those seeking signs of a possible easing of policy will look for the socalled 'fan chart' forecasting inflation, which may be pointing lower than in August due to sliding commodity prices and improving government finances.
The consumer price index reflects the drop in shopping bills for potatoes, tomatoes and onions, which are at least 30% lower than their recent peaks. That should comfort Rajan, for whom food prices are a key determinant of monetary policy since it pinches the pockets of more than three fourths of the population.
The key repo rate, at which RBI lends to banks, is at 8%, while SLR is 22%. The cash reserve ratio, the proportion of deposits that has to be kept with the RBI without any interest, is at 4%. The bimonthly monetary policy review is scheduled to be announced on Tuesday at 11 am.
Rajan, who has raised rates thrice since last September, has been adamant that the back of inflation needs to be broken if the country has to get back to the path of sustainable, high economic growth. Unless savers are provided positive real returns, the financial system may become skewed and any interest rate reduction could be temporary, forcing the RBI to reverse its stance quickly.
Although Rajan's stance has drawn protests from industry and short-term investors, the Narendra Modi government has backed him with Jaitley holding off from calling for a reduction in rates.
"The impact of both (coal block penalties and the falling crude price), assuming all other things unchanged, would bring down the fiscal deficit by 18 basis points to 3.95% from the budget estimate of 4.13% for 2014-15," said SK Ghosh, economist at State Bank of India. "With increased earning of the exchequer, the targeted fiscal consolidation roadmap of limiting the same at 3% by fiscal year ending 2017 would be significantly easier to achieve."
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Choppy Session today. No Direction. So lets wait for the RBI Policy - which may decide the direction. Cheers!!!
