Monetary policy: Will RBI go for a rate cut on April 5?

It’s been six months since Reserve Bank of India (RBI) governor Raghuram Rajan reduced repo rate by 50 basis points to 6.75 per cent on September 29. The consensus view now is for 25 basis points cut by the central bank in the upcoming monetary policy scheduled on April 5. The government has also recently pared small savings interest rate by up to 1.3 per cent providing cushion to the Reserve Bank for cutting the policy rate.

Repo rate is the rate at which the central bank lends money to commercial banks in the event of any shortfall of funds.

For stock market perspective, a recent rally in the rate sensitive pack indicates that market has already discounted a cut of 25 basis points and anything over and above that would push the index higher else consolidation will continue. The 30-share Sensex advanced 6.26 per cent to 25,269.64 in the past one month till April 1.

The index was at 23,779.35 on March 1 last month.

According to Religare Institutional Research, going by RBI’s stated preference for maintaining real interest rate in the 1.5-2 per cent range, there is room for 50 basis points rate cut. However, RBI may cut repo rate by only 25 basis points in April policy and rather wait for further development on monsoon and Seventh Pay Commission implementation while also taking steps to improve transmission. Consumer Price Index (CPI) was 5.2 per cent in February 2016.

Post Union Budget 2016, rate sensitives have outdone benchmark indices as the the BSE Bankex, BSE Auto and BSE Realty index soared 12.64 per cent, 8.28 per cent and 15.47 per cent till April 1.

RBI Governor Raghuram Rajan on March 12 said government’s sticking to fiscal consolidation roadmap of reducing deficit to 3.5 per cent of the GDP in 2016-17 was comforting, a statement which raised hope for rate cut in April 5 monetary policy.

On the rate cut, G Chokkalingam, managing director, Equinomics Research said, “India needs a rate cut badly. But, I believe the RBI Governor will wait for monsoon and will not go for a rate cut on Tuesday. In this scenario, we may see market losing around 250-300 points in the next few trading session. However, if there will be a rate cut by 50 basis points we may see some rally in domestic equity markets. A 25 basis point rate cut will not impact market sentiments.”