INSUBCONTINENT EXCLUSIVE:
economy makes a cut in the central bank's benchmark interest rate highly likely this week, but analysts say policymakers should also find
ways to boost banks' liquidity to ensure they drop their lending rates too.Beginning a three day review on Tuesday, the Reserve Bank of
India's six-member monetary policy committee (MPC) can draw comfort from subdued inflation
Running at 2.92 per cent annually in April, it has stayed below the medium-term target of 4 per cent for the past nine months.Two-thirds of
66 economists polled by news agency Reuters expect the MPC to wrap up on Thursday by cutting the repo rate by 25 basis points, but that
survey was taken even before the government released far worse than expected economic growth numbers, so expectations for a cut have
probably hardened.If they are right, and the RBI does lower the repo rate to 5.75 per cent it will be the third meeting in a row since
February that India has cut interest rates
The last time it moved this quickly to lower rates was in 2013 to revive the moribund economy from growth rates that had slipped to a decade
low.The trouble is banks are laden with bad debt and are scared of losing customers if they cut deposit rates, constraining their ability to
cut lending rates despite all the prods from the RBI.State Bank of India, the country's largest lender by assets, has cut its key lending
rate by only 10 basis points in response to the 50 bps cuts by the RBI.A series of defaults at lender Infrastructure Leasing Financial
Services last year has raised concerns about the country's shadow banking industry with other lenders also facing trouble accessing
capital and rating downgrades.The RBI had retained its "neutral" stance after the rate cut in April but traders said a change in this stance
to "accommodative" will be more comforting for markets than just a rate cut, especially after the recent GDP numbers."Liquidity woes in
banking system are far from over," said Lakshmi Iyer, chief investment officer (debt) at Kotak Mahindra Asset Management Company."Given the
global as also domestic scenario, the MPC may well choose to gratify the markets with a benchmark rate cut
What is more important for markets is the MPC guidance than the actual rate action."The economy really does need help.Data out on Friday
showed annual economic growth running at 5.8 per cent in the January-March quarter, sharply down from 6.6 per cent in the previous quarter,
well below forecasts and the slowest in more than four years."The market is expecting RBI to cut the rates by at least 25 basis points, and
we will not be surprised if they decide to cut the rate by even 50 bps, to infuse liquidity and push growth," said Romesh Tiwari, head of
research at CapitalAim.Fiscal, rain and oil uncertaintiesRe-elected last month for a second term regardless of the slowdown, Prime Minister
Narendra Modi needs to stop the rot, and his economic strategists are working on big-bang reforms.New Finance Minister Nirmala Sitharaman is
due to present a budget on July 5 that many analysts expect to be expansionary, though the she cannot afford to let the deficit slip too
much.Until then the RBI will have to live with the uncertainty over the new minister's fiscal plans, while knowing that when the
government does boost spending it will go some way to boosting banks' liquidity.Also, the effect of the drain on banks' liquidity from
political parties' demand for cash during the election campaign should begin to fade.Oil prices and the monsoon rains are less predictable
The central bank had lowered its Jan-March 2020 inflation forecast to 3.8 per cent but warned it could be higher if food and fuel prices
rise abruptly or if the fiscal deficit overshoots targets.
