How time has changed for RBI in deciding rate cut

Urijit Patel is set to announce its second monetary policy as the Reserve Bank of India's governor on Wednesday.

Many analyst and experts believe a rate cut is on the way. If a rate cut is supposed to take place then this would be second consecutive rate cut.

In previous policy, the RBI trimmed down the rates by 25 basis points, which led the policy repo rate to 6.25% from 6.50%, while reverse repo rate was adjusted to 5.75% and that of bank rate at 6.75%.

Factors that supported RBI to take the decision were different during those times.

Inflation: Led by normal monsoon and ease in food inflation, since August consumer price index (CPI) inflation has been relaxing, so much so that in the month of October 2016, it was just margins away of the government's target to attain 4% over the next five years.

source: tradingeconomics.com

While wholesale price index (WPI) inflation has seen a constant rise since FY17 started, moving out from the deflationary territory of FY16.

source: tradingeconomics.com

Gross Domestic Product (GDP): During the April-June 2016 period (Q1FY17), India's GDP growth slowed to 7.1% compared to 7.5% a year ago same period and 7.9% of the preceding quarter.

source: tradingeconomics.com

However, the slowdown was continued in the second quarter of July – September 2016. The country's GDP stood at 7.3% during this period as against 7.6% in July – September 2015.

Index of Industrial Production (IIP): India's IIP in the month of September was positive by 0.7%, following two straight months of falls (-0.7% in August and -2.5% in July) and slightly above market expectations of a 0.5 percent gain.

source: tradingeconomics.com

Bank Deposit and Credit Growth: Till September 2016 the bank deposits were at a growth rate of 5%, which was a sequential improvement from 4.4% witnessed in the similar period of the previous year.

On the other hand, the credit growth continued to be sluggish at 0.8%, compared to 2.3% of September 2015, throwing light on the subdued investment scenario in the country.

Above were some factors which grabbed a rate cut in India's pocket in October, but this time the tables have turned towards PM Narendra Modi's demonetisation method for black money which was announced on November 08,2016.

Now the situation is such that everything related economically is dependent on performance of demonetisation considering that Modi had scrapped 86% of the India's currency.

So far, 28 days have finished for this process and in those period lot has changed.

Bank deposits have surged to 8.4% till now, compared to 6.1% a year ago same period. As of November 27 2016, the banks have collected over Rs 8.44 lakh crore of exchange and deposits from the people.

But as per many analyst, India's economic growth is at stake with demonetisation.

Many analysts have already chalked down the India's GDP growth by 70 – 100 basis points in the coming months ahead.

Not only that, the CPI inflation and WPI inflation are expected to face brunt of demonetisation in short term led by slowdown in agri and manufacturing sector.

Care Ratings said, “Recent and unanticipated move of demonetization and the resulting cash crunch has created distortions in the market for agricultural and farm produce and also expected to impact the sowing of the Rabi crop. However, the demand and supply conditions will get normalized from January onwards and this would help keep retail prices stable.”

Apart from it, the bank's credit growth is no where near revival. The credit growth from April – November 2016 was at 1.4%, lower from 4.2% in the corresponding period of the previous year.

Care Ratings said, “The expected slowdown in the economy and issues in the real estate sector post demonetization are expected to have an unfavorable impact on credit growth, which has so far mainly been led by the retail segment. The expected slowdown will hinder credit off take by industry.

Lastly, Care said, "Based on the movements of these economic parameters, we expect a 25 bps rate cut in tomorrow’s RBI policy view and another 25 bps cut for the rest of the fiscal."