A strong mandate to the Modi-led NDA government could pave the way for softer interest rates regime from the Reserve Bank of India (RBI) when it announces its second bi-monthly policy for FY20 on June 6. One of the uncertainties over the monetary policy was the forthcoming Budget’s adherence to fiscal consolidation. Before elections, there was a risk of slippage as the Congress-led UPA had promised minimum basic income of Rs 72,000 under its proposed Nyay scheme.
According to the reports, RBI governor Shaktikanta Das had indicated that he will use all possible instruments to ensure liquidity in the markets. On interest rates, he had called for more flexibility in policy making by suggesting that in an unpredictable environment, the central bank should not be a prisoner to its stance and should have the freedom to move rates either way. Das had also said that rate changes need not be in multiples of 25 basis points (100bps = 1 percentage point) and the central bank should be able to move rates by even 35bps to add nuance to its signal.
Syndicate Bank MD & CEO Mrutyunjay Mahapatra said, “RBI’s successive rates have had an impact on the lending rates of a limited number of banks. I feel they might wait for the existing cuts to be digested or they could cut rates to signal easier money as short-term rates are a bit tight.”
Most economists feel that there is a case for the banking regulator to ease rates given the slowing growth momentum and benign inflation. “Given that our inflation forecasts remain below 4% during this year, growth remains below our estimated potential, and the Fed continues to be dovish, we project space for one more rate cut by the RBI,” said Prachi Mishra, an economist with Goldman Sachs India. It is also a widely held view that the RBI would need to do more to ensure that there is a transmission of the earlier rate cuts.
Reportedly, it expected liquidity in the system to improve as money comes back into banks after the elections.
