High inflation, higher household borrowing by govt may force RBI to go for status quo

A five-year high inflation, a substantial rise in government deficit projections and a whopping increase in its borrowing from the household savings this year will weigh heavy on the Reserve Bank of India's mind while it takes the monetary policy decision to be announced on Thursday.

As long as the government keeps cornering the household savings, banks will not be able to cut deposit rates and lending rates cannot come down, if deposit rates remain high, thus making the RBI rate cuts meaningless.

The macro-economic developments emerging out of the budget for 2020-21 point towards a pause in RBI policy, though certain economists believe there could be a mild rise in rates.

“The Budget does not provide any counter-cyclical stimulus to boost consumption, and the Reserve Bank will have to do the heavy lifting to boost growth by cutting rates," according to the country's largest private sector lender HDFC Bank.

It said the monetary policy committee may opt for a status quo as the headline inflation print will continue to be above 7%, much higher than the RBI's upper band of 6%, the bank said in a report.

This will be the RBI's last monetary policy for the current financial year. This comes in the wake of the government estimating an economic growth of 5% in the current financial year on the back of factors such as a slowdown in domestic and global economy, including weakening consumption demand in the country.

In December, the retail inflation, peaked to a five-year high of 7.3%, mainly due to costlier vegetables, specifically onion and tomato.

The Economic Survey 2019-20 has projected the Indian economy to grow at around 6-6.5% in the next financial year beginning April 2020.

"We look for the central bank to remain on an extended pause on rates (even as supply-induced shocks dissipate) but maintain an accommodative bias to ensure cost of capital remains stable and favourable," according to Radhika Rao, senior vice-president and economist at DBS Group Research.

The RBI has cut the repo rate cumulatively by 135 basis points in 2019, but lending rates have come down by only nearly 50 bps.

In its previous monetary policy review in December, the RBI had maintained a status quo, leaving the key repo, the rate at which it lends to banks, at 5.15%.

Another big hurdle, the RBI is that the government has estimated Rs 2.4 lakh crore of withdrawal from small savings to finance its expenditure in 2020-21. It has also revised the current year's borrrowings from the household sector to Rs 2.4 lakh crore, higher from Rs 1.3 lakh crore. With such a large borrowing of the centre from small savings, it (centre) would never allow the banks to raise rates on them.