The RBI governor was hawkish on inflation, dovish on liquidity and neutral on his continuation. Given this combination, it is not surprising that both bond and equity markets paid only passing attention to the monetary policy. But beyond the short term takeaways for the market, the RBI appears to be running out of options to help the economy or the banks. Firstly it appears the space for rate cuts is exhausted, even if the governor stopped short of saying it. According to the statement the stickiness in services inflation comes from high water charges, tuition fees, house rents, and auto and cab fares. Even with a good monsoon and better capex by the government, the prices of these elements aren’t likely to fall. And food inflation, which stands at 6.3 percent, has to fall very sharply in coming months to pull down the headline. This appears tough given the supply dynamics in items like sugar and pulses. And finally, with the seventh pay commission and OROP, CPI is more likely to overshoot 5 percent in Jan 2017 eliminating any chance of a rate cut. The governor argued that while he doesn’t have space to cut rates now, banks do. But bankers don’t seem to buy the argument. Many of the big banks want to see how much deposits they will lose when the FCNRB deposits leg it out in September.
0 comments:
Post a Comment