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shrinidhi Rajan made post

What are the reasons for the RBI not cutting rates when the markets were all expecting a rate cut by the RBI?

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VIKAS DELIWALA answered.
8 months ago


WELL AS PER MY VIEW AND ANALYSIS :-

CORPORATE TAX HAS ALREADY HELPED THE MARKET AND BEFORE CORPORATE TAX ANNOUNCEMENT MOST OF COMPANIES HAS GIVING RESULTS ABOVE EXPECTATIONS.

HENCE, IF COMPANIES CAN GIVE SUCH AWSOME RESULTS WITHOUT TAX BENEFITS NOW THIS QUARTER THEY HAVE TAX BENEFITS.





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Riya Dwivedi answered.
8 months ago


It is a little off market expectations but not entirely surprising. Broadly, there were 4 reasons for RBI to no cut rates this time around in the policy.

RBI wants to first get inflation under control

MPC decision to keep status quo on rates can be largely attributed to concerns over inflation, which has been rising in the last few months. For example, the CPI inflation for October touched a level of 4.6%; well above the RBI comfort zone of 4% average. What is driving this inflation higher? The key driver has been food prices, as you all must have observed the way the price of onions has gone through the roof. In fact, food inflation in October touched a 39-month high of 6.9% due to unseasonal rains post September. Also the general expectation is that inflation will continue to remain high in the coming months also.

Real rates must remain attractive to get portfolio flows

This is something we often overlook. Since the beginning of 2019, repo rates are down by 135 bps and inflation is up by 200 bps. This has led to the real interest rates narrowing from nearly 4% to just about 0.55%.That is not attractive for foreign portfolio flows into debt. They can get better returns in other EM countries. RBI was wary of these flows slowing.

Transmission of rates is yet to improve

Transmission shows how much of the rate cuts are actually passed on to the borrowers. Only that will reduce cost of credit and improve credit off-take. In the case of bank lending, the median MCLR has fallen by just 44 bps despite the RBI cutting repo rates by 135 bps. However, transmission has surely improved since banks moved to external benchmarking from October 2019. RBI may look to cut rates further once there is greater traction on transmission of rate cuts.

Given a fiscal boost too

In the last few months, the government has realized that rate cuts alone will not work. Fiscal boost has come in the form of lower personal taxes, higher exemptions, sharp cut in corporate tax rates to 22%, special incentives for new projects, boost to infrastructure spending etc. RBI and the government will get a better picture of the tailwinds of these announcements in the next couple of months and by the next policy on Feb 06, 2020, the Union Budget would also have been announced. It looks more like wait and watch.