Cash-Crisis India Looks Likely to Cut Rates

  • 36 of 44 economists surveyed predict cut; rest see no change
  • Patel’s assessment awaited on cash ban effects, Fed decision

Will India PM Modi's Crackdown on Corruption Work?

Investors have one big question for India’s central bank at Wednesday’s policy review: will Prime Minister Narendra Modi’s clampdown on cash hurt economic growth and how deep will the pain go?

Private analysts predict that India will lose its status as the world’s fastest-growing big economy this quarter, as the government’s shock decision last month to ban 86 percent of currency in circulation dents demand. While Modi’s administration last week said it’s too early to assess the impact of the move, indicators since then point to a downturn.

That warrants a cut in the benchmark repurchase rate to 6 percent from 6.25 percent, according to 31 of 44 economists in a Bloomberg survey. Five predict a reduction to 5.75 percent and eight see no change.

"It is possible that the central bank could decide to front load rate cuts if it perceives the negative impact on growth to be severe and long," Kaushik Das, Mumbai-based economist at Deutsche Bank AG, said in an e-mail. "We see risks to growth biased to the downside."

Governor Urjit Patel is joined by two Reserve Bank officials and three academics on the monetary policy committee. Here’s what to look for in the policy statement, which is scheduled for release at 2:30 p.m. in Mumbai followed by a press conference 15 minutes later.

Clear-Eyed Assessment

Patel -- who’s been criticized for staying low amid the cash chaos -- told BloombergQuint last month that the Reserve Bank of India is assessing the impact of Modi’s Nov. 8 decision and would list its observations at the monetary review.

Recent indications are bleak. Economists slashed their forecasts for October-December growth to 6.5 percent from 7.8 percent, lower than the 6.7 percent analysts project for China. Private gauges published over the past week signal a contraction in the key services sector that contributes about 60 percent to gross domestic product.

The slump in demand is expected to slow inflation, pushing the consumer price index down from a 14-month low hit in October.

Fed Decision

Patel and his rate panel will also have to factor in an expected increase in interest rates when the Federal Reserve meets next week. Investors, in anticipation, have started pulling money out of emerging markets such as India, roiling the rupee that sank to a record low in November.

India’s currency had its worst November in five years as overseas investors withdrew a net $2.6 billion from local shares and foreign holdings of the nation’s sovereign and corporate bonds dropped by $2.1 billion.

A steeper-than-expected cut in India’s policy rate would undermine the rupee, Gao Qi, Singapore-based foreign-exchange strategist at Scotiabank, wrote in a report on Tuesday.

Liquidity Juggle

The most immediate concern for Patel, however, would be a surge in banking liquidity as citizens rush to exchange their defunct currency notes. With money-market rates tumbling, the central bank resorted to extraordinary measures to protect India’s financial stability.

On the streets, Indians are concerned about a lack of cash as the nation’s mints struggle to replace the more than 23 billion bills sucked out by Modi’s move. While the crucial pay day period has passed, the festival and wedding season continues through March, keeping demand for money high.

"The Reserve Bank of India is likely to outline measures to manage the systemic liquidity, which would be of interest to the banks, and provide some timeframe by which cash liquidity would increase, that would be of significance to the public," said Naresh Takkar, managing director at ICRA Ltd., the local unit of Moody’s Investors Service.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE