Ahead of the Reserve Bank of India (RBI) bi-monthly monetary policy review, the Indian equities markets opened on flat note on Wednesday. Investors are cautious ahead of the key announcement, and expect the central bank to ease its key lending rates.
Mumbai: An intense cash shortage in India could force the central bank to cut interest rates to a six-year low on Wednesday as Prime Minister Narendra Modi's currency gamble threatens to hit nearly every aspect of the economy, from consumers to supply chains.
A majority of the nearly 60 analysts polled by Reuters predict the Reserve Bank of India (RBI) will cut the repo rate by 25 basis points (bps) to 6.00 percent, the lowest since November 2010, while six predicted a deeper 50 bps cut.
Pressure on the RBI and Governor Urjit Patel to act has grown since Modi stunned the country on Nov. 8 with a drastic plan to abolish 500 and 1,000 rupee notes ($7.35-14.70), removing 86 percent of the currency in circulation in a bid to crack down on India's "shadow economy."
Data so far shows the measure has hit the cash-reliant economy more than expected: auto sales plunged and services sector activity dived into contraction last month for the first time in 1-1/2 years.
The prospect that India's robust growth will be derailed could offset any worries about a volatile global environment, which saw the rupee INR=D2 sink to a record low last month as part of a sell-off in emerging market assets.
Representational image. Reuters
According to Moneycontrol, "the RBI, guided by the newly-formed six-member monetary policy committee (MPC), is widely expected to cut its key lending rate — the repo rate — by 25 basis points to 6 percent. The MPC’s decision will be likely influenced by two factors: (a) the fall in consumer and investment spending because of the currency drain out, and (b) the outlook on inflation and the rupee’s value. In recent history, rarely has a single policy decision in the financial world had such an immediate impact as India’s move to retire old Rs 500 and Rs 1,000 currency notes."
Analysts say the RBI has room to act given consumer inflation eased in October to 4.20 percent, the slowest pace in 14 months and below the RBI's target of 5 percent for March 2017.
"We expect the RBI monetary policy committee (MPC) to cut rates by 25 basis points," said Radhika Rao, an economist with DBS Bank, in a note.
"While lingering external uncertainties raise the odds of a no-move, the RBI MPC is likely to take a growth supportive stance to offset downside risks to growth from the demonetisation effort."
A rate cut is not without risks. It would mark a second consecutive 25 bps easing by the six-member MPC, and some foreign investors warn it could raise concerns about whether the central bank is losing its focus on inflation.
A cut would also come at a time when emerging markets are under pressure after the election of Donald Trump as U.S. president last month sparked a surge of capital flows back into the United States, a trend that could accelerate as the Federal Reserve gears up to raise interest rates next week.
In India, foreign investors sold a net $4.7 billion in debt and equities in November even, though the country is seen as in better shape than other emerging markets.
But a rate cut would signal the RBI's priority is in supporting the economy, which grew an annual 7.3 percent between July and September, the fastest rate for a large economy in the world but still below the levels needed to sustain full employment.
Investors will also want more details from Patel about how the RBI is managing the process of demonetisation after coming under criticism from market participants for frequently announcing adjustments to its policies.
Most analysts say the RBI will likely partly roll back a directive for banks to place their entire deposits under the central bank's cash reserve ratio in a bid to absorb the extra liquidity generated by the government's banknotes move.
The need to keep it in place has eased after the government announced last week it would raise the issuance of special bonds to soak up the liquidity.
Ahead of the Reserve Bank of India (RBI) bi-monthly monetary policy review, the Indian equities markets opened on flat note. Investors are cautious ahead of the key announcement, and expect the central bank to ease its key lending rates.
The key Indian indices traded marginally in green during the early morning trade session, as healthy buying was witnessed in oil and gas, automobile and metal stocks. The wider 51-scrip Nifty of the National Stock Exchange (NSE) inched up by 17.35 points or 0.21 per cent to 8,160.50 points.
The barometer 30-scrip sensitive index (Sensex) of the BSE, which opened at 26,456.21 points, traded at 26,445.67 points (at 9.25 a.m.) -- up 52.91 points or 0.20 per cent from the previous close at 26,392.76 points. The Sensex has touched a high of 26,469.93 points and a low of 26,418.05 points during the intra-day trade so far.
The BSE market breadth was tilted in favour of the bulls -- with 931 advances and 326 declines. On Tuesday, the equity markets closed on a flat note as profit booking and caution ahead of key global events capped gains.
The barometer index was up 43.66 points or 0.17 per cent, while the NSE Nifty rose by 14.40 points or 0.18 per cent.
With inputs from IANS and Reuters