US President Donald Trump
The shock of the tariff imposed on India by US President Donald Trump on Wednesday has raised a question mark on the central bank’s interest rates, as some economists are expecting the rates. Prior to Trump’s announcement, most economists were expected to have no change in rates after the governor’s cautious stance in the June policy meeting. The majority of 23 out of 34 economists surveyed by Bloomberg are still expecting that the Reserve Bank of India will keep its rates stable this week.
At the same time, some banks have recently changed their forecasts. Soumya Kanti Ghosh of State Bank of India Limited and Dheeraj Nim of Australia and New Zealand Banking Group, are now estimating the relaxation of fourth points in interest rates on Wednesday to save Asia’s third largest economy.
RBI has reduced the repo rate by 100 basis points to 5.5 per cent since February, including unexpectedly large cuts in June. Since then, inflation has come to the lowest level in more than six years, while Trump has imposed a 25 percent tariff rate on India and threatened additional punishment, which has tarnished the possibility of development.
Last month, Governor Sanjay Malhotra had said that there is scope for further cuts, although the boundary of relaxation still remains high. The central bank is also expected to maintain its “neutral” policy stance, which will give some flexibility to the rates amid global uncertainty.
SBI’s Ghosh said that there is no point in stopping the rate cuts right now because inflation will remain below the RBI’s 4 per cent target and around the next year level in this financial year. He said that the lump sum cut will help increase spending in the festive season and promote loan increase in the festive season.
However, Ghosh said that the central bank should stop after the repo rate fell by 5.25 per cent. The repo rate was 5.15 percent just before the epidemic in February 2020, which was the lowest rate till that time. He said that during the epidemic, the RBI reduced the major rate to 4 per cent, but 5.15% “foundation rate” should remain for normal time.
Inflation and growth
India’s expensive has come down to 2.1 percent in June, which has been less than the RBI target for five consecutive months. With the encouraging progress in good monsoon and sowing, the increase in prices in the current financial year started from April will be lower than the RBI’s 3.7 per cent estimate. On the other hand, Trump’s tariffs on India – which are more than Asian rivals like Vietnam and Indonesia – can reduce the growth rate by up to 30 basis points. Analysts will closely monitor the RBI assessment of growth and influence of American tariffs on inflation to assess the future policy direction.
Economist Shantanu Sengupta, an economist of Goldman Sachs Group, said in a media report that the RBI will probably reduce its “inflation and growth forecasts and provide a soft trend to assist in the monetary policy transmission. He has estimated the inflation rate to be 3 per cent for the financial year.
Remedy for liquidity
Bond traders will expect more clarity from the central bank about the recent cash withdrawal action, what level of surplus liquidity he considers. They also expect that RBI issue an updated liquidity management framework to ensure that its rate decisions are effectively implemented in a broad economy.
After CRR cuts in June, the decision to withdraw short -term cash by RBI confuses traders. As soon as the rates reached above the policy rate, the central bank was forced to enter short term liquidity. Currently, the additional liquidity in the banking system is 3.3 trillion rupees. With the effective of cutting CRR cuts in the stages starting from September, 2.5 trillion rupees are expected to be added.
Bond and rupee
According to the Bank of India Investment Managers Private Limited, the change in interest rates indicates that the RBI will keep the rates stable in August, and in October it is very low to cut fourth points. The company’s Chief Investment Officer Alok Singh said in the media report that if there is a constant softening in inflation – the core inflation can be softened in the yield, especially in medium and long -term areas. He further said that on the contrary, any aggressive unpredictable or external shock can increase the yield.
After the Reserve Bank of India relaxed interest rates and reduce liquidity, India’s 10-year-old benchmark bonds have increased by about 10 basis points in the last two months. The central bank’s comments will also be monitored on the rupee, which is hovering around its record lower level in February. The cut in interest rates can make the currency more weakened by making local assets less attractive.