The Reserve Bank of India cut the repo rate by 25 bps on June 06 when it announces it upcoming monetary policy. Since the market is agog with such expectations following the landslide victory Prime Minister Narendra Modi got with 352 seats with allies in the 542 member Lok Sabha for its 17th session.
On the day the results were announced, sensex closed at 40,000 marks with high expectation from the new government of stability, new monetary policy and fiscal policy relaxations under the new finance minister Mr Nirmala Sitharaman. Ever since Urjit Patel left the bank as the chief and …..The expenditure secretary was shifted to the Governor’s, the differences between the FM (then arun jaitley), had narrowed down the demand for banks dropping lending rates. And this could be possible only if the repo rate, which is the rate at which RBI lends to commercial banks (in public sector) is brought down.
Since the last year, Urjit Patel, under pressure revised the repo rate once and later the new governor….. Cut the repo rate twice in a major effort to kick start the manufacturing the manufacturing process and the GDP growth rate. But unfortunately, the cut has not been enough to enthuse either the banks, flush with money derived from demonetisation, or the manufacturers to borrow and kick start the manufacturing process.
So another cut 3rd in 18 months of 25 basis points is expected from Modi Version 2.0 on June 06. On Monday when the markets opened for the first time ever investors bought shares anticipating a rate cut on Thursday on the back of a weak growth data, media reports claimed.
The report said the 30 share Sensex gained 553.42 points or 1.39 % to close at a record 40,267.62. The broader NIFTY closed above the 12,000 mark at 12,088.55, up 165.75 points or 1.39%.
Unfortunately, government last week showed that gross domestic product (GDP grew at 5.8% in the January March 2019 Quarter, that is the Q4 of FY 2018-19. This has dragged down the full year growth projections to five year low of 6.8% against a 7.5% growth projection made in the FY 2019-20 budget and the high of 8% reached in FY 2016-17 by the BJP government.
If the RBI cuts key lending rates, it would be the 3rd time in a row the bank is affecting a cut. RBI cut the repo rate by 25 basis points on each occasion earlier last year. Paradoxically the Sensex gains in the Indian market came amid a weak trend in most other markets because the impact of the trade war between USA and China and US government refusal to extend the waiver of sanctions on Iran beyond May was pulling them down.
It is surprising that the Indian markets hit the tail wind and went against the global market trends , Deepak Jasani, Head Retail Research, HDFC Securities was quoted by the media saying. Basically what buoyed up the Indian markets were falling crude oil prices, the inflows from Foreign Portfolio inestors (FPIs), while traders kept building positions ahead of the RBI’s monetary policy meet and next month’s budget.
The Modi government has a tough task cut out for itself in the months to come. After the Presidents address in Mid-June, the government has to present a full-fledged budget amid the farm loan waivers already announced by the government as soon as it took over the reins of power for a 2nd time. The Finance Minister Nirmala Sitharaman has to find the resources to write off the farmers loans across the board. AT the same time she has to announce measures that have kick start the manufacturing process, induce banks to lend at lower rates, increase consumerism, create jobs, and remove joblessness in certain sectors. Only the services sector such as the IT sector where firms such as TCS, Wipro, Infosys, HCL,and Accenture are bringing in foreign exchange and maintaining a growth rate. But this bubble could burst as Trump prepares for tougher measures on the IT front.
India is the biggest contributor to the US treasure among overseas investors contributing about 2 billion US dollars as taxes to the IRS in the government there. IT Minister Ravi Shankar Prasad is likely to go back and forth to the US government to take a second look at the tougher policies on the IT from that may severely affect Indian IT companies operating there.
Against this background, it would be too much expect the 3rd repo cut, even if it be 50 bps, will make a major impact on the manufacturing industry or the investors. But it will ease a worse situation to a better one.