October 30, 2017

Are the decks clearing for an RBI rate hike?

Recall that RBI’s grouse was that rate cuts would be pointless given the reluctance of banks to pass on the benefits to the real economy. Now that the government has remedied this, it should improve monetary transmission. What better way to boost growth than to give it a shot of interest rate cut, especially when banks will be willing to pass this on?

However, it is not that simple. For one, the whole process of capital infusion would be over eight quarters. Responding to a long-drawn process prematurely with a rate cut boost before the results are obvious would be foolish. In RBI’s own words, bank recapitalisation is just a support mechanism when investment demand revives.

... the capital infusion does not materially change anything on the inflation or the growth front immediately. But along with the capital infusion, the government also announced an investment of Rs7 trillion over five years to build roads. This could nudge awake a slumbering investment climate and in turn spur growth. That sits conveniently with RBI’s bullishness on growth recovery in the second half of the fiscal year. The added fillip to growth will most certainly keep up the pressure on core inflation.

That gives currency to hike, not cut policy rates. Goldman Sachs believes so as it is forecasting three hikes by the end of 2018.

Read more at http://www.livemint.com/Money/7sopEIx6BA6UwUqZc4HrjK/Are-the-decks-clearing-for-an-RBI-rate-hike.html

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