R jagannathan writes ……The case for a rate cut has never been stronger. So, when the Monetary Policy Committee (MPC) meets on 6 and 7 June, it should recommend a 50 basis points cut in the repo rate.
The last two policies saw the MPC and the Reserve Bank of India (RBI) turning cautious. They have been fretting more about inflation and less about growth, with the February policy shifting the central bank’s credit stance from “accommodative” to “neutral”. The April policy maintained status quo.
Luckily for the Indian economy, the demonetisation of high-value notes in November last year created a huge cash surplus with the banking system, enabling them to cut deposit rates and also lending rates on retail loans.
I believe we will see a change in policy guidance ( neutral to dovish) from RBI and although i do agree with some points made in the article https://swarajyamag.com/economy/governor-urjit-patel-must-take-a-deep-breath-and-offer-a-50-bps-rate-cut-on-7-june by R jagannathan , I think it is too early to call for a rate cut although this would possibly be the small window of opportunity opened just before GST kicks in and dismal US NFP (employment) data. Banks flush with money from demonetisation have not only slashed deposit rates but lack of credit demand has led them to slash consumer loans and mortgage rates aggresively. Even market determined rates ( bonds and cp) have come off sharply since demonetisation. The only rates which have not fallen is Govt securities and SDL ( state development loans) and that is owing to excess ownership and supply of paper rather than demand.The corporate credit demand has been muted for sometime because companies are running down their inventories as there is uncertainity of GST impact of these inventories and hence that is one reason even working capital demand is weak.RBI can always give a reason that they will take a call on monetary policy after they see the impact of GST on inflation.
India needs growth momentum to sustain and in absence of corporate capex either Govt will have to expand its balancesheet and continue spending like it did in Jan-Mar quarter or monetary policy needs to make consumer borrowing (mortgage and other consumer borrowing) and value of assets more attractive by cutting rates .
( I must point out here that i am not in favor of leveraging household to generate growth without corresponding increase in employment opportunities and wage growth)
We will come to know in this policy whether RBI is willing to take this risk and share Govt’s Burden