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RBI monetary policy review: Will Raghuram Rajan at last speak about his second term today?

Stock market investors and India Inc would keenly be awaiting clues from the RBI Governor's monetary policy, more so on the economy and uncertainty over his much-talked second term.

Aprajita Sharma August 9, 2016 | Updated 12:05 IST
Raghuram Rajan, Governor, RBI
Raghuram Rajan, Governor, RBI (Photo: Reuters)

Your guess is as good as ours. In all likelihood, he would not. But the stock market investors and India Inc would keenly be awaiting clues from the RBI Governor Raghuram Rajan's monetary policy, more so on the economy and uncertainty over his much-talked second term.
Analysts largely believe the central bank would maintain a status-quo on policy rates in the second bi-monthly policy review of financial year 2016-17. They though feel that any talk on Rajan's second term would generate higher interest as a host of foreign brokerages have already come up with warnings, saying no second term to Rajan would trigger steep short-term equity outflows and may impact the stock market and the domestic currency alike.  
Standard Chartered Bank in a research note, said, "We expect the RBI to keep the repo rate on hold at its monetary policy meeting on 7 June. Global uncertainty has increased ahead of the UK's June 23, 2016 EU membership (Brexit) referendum and possible Fed rate hikes. The central bank is also likely to be cautious due to the recent rise in the headline CPI reading."

ALSO READ: 60,000 online petitions back Raghuram Rajan's second term

Repurchase or repo rate is the rate at which the RBI lends money to commercial banks in the event of any shortfall of funds. The current repo rate stands at a five-year low of 6.50 per cent.
Abheek Barua, Chief Economist, HDFC Bank also said it would be rational for the RBI to be in a wait-and-watch mode for now as we are entering a period of increased global uncertainty, driven by factors ranging from the Fed's rate stance, UK's referendum on staying within the EU in June and the possibility of adverse news flow from China.
Talking of Rajan's second term and its impact on the market, Rohit Gadia, Founder & CEO, CapitalVia Global Research said he must be given second term mainly because of his popularity among the foreign investor, which brings back investor confidence greatly.

He believes Rajan's exit from RBI will have a short term impact on equity and forex market alike.

Below is a compilation of issues Rajan's policy review may touch upon:

1) On future rate cuts

Barua of HDFC Bank believes the central bank will wait for the onset of monsoon to see its impact on both growth and inflation before taking any action on the rate front.

Bank of America-Myrill Lunch also said the RBI will reiterate April's relatively dovish policy stance of watching macroeconomic and financial developments in the months ahead with a view to responding with monetary action as space opens up.

"Assuming normal rains the India Metrological Department (IMD) predicts, we expect the RBI to cut rates by 25 basis points on August 9 as we see no reason to delay further.

Beyond this, however, the brokerage sees little headroom for further easing.

2) RBI's take on surging oil prices

As crude oil prices are seen to notch up from the low base in the days to come, the RBI will assess its impact on inflation before moving any further on the rate cut.

"Although the inflation impact of a jump in oil prices to $50 per barrel from $35 per barrel is mathematically higher from a move to $115/bbl from $110/bbl, the latter situation is surely more "inflationary" than the former," explained BofA-ML.

The seasonal drop in crude prices in September to an expected $39 per barrel (BofAMLe) should help contain headline CPI inflation in the months ahead, it added.

3) Rupee liquidity in the system

Standard Chartered believes the markets are more concerned about rupee liquidity in the banking system than policy rate cuts at present.

"The liquidity deficit has narrowed in line with the RBI's revised stance since April on an accelerated pace of bond buybacks and government spending. We expect the deficit to narrow further until September," said StanC.

The foreign-currency non-resident (FCNR) scheme for non-resident Indians matures in the month of September. A fresh INR liquidity shortage may emerge then if they redeem their deposits instead of rolling over. Market will keenly watch how RBi plans to manage this.

BofA-ML believes the RBI will sell forex reserves to fund FCNR maturity outflows in September, if it needed to.

"If our expected Fed hike in September stalls portfolio inflows, we expect the RBI to even roll over the FCNR scheme," added the brokerage.

4) Blisters of bad loans in banks

The gross non-performing assets (NPAs) of public and private sector banks increased considerably in the last two quarters after RBI instructed all banks to complete the process of recognizing and providing for their existing stressed assets under asset quality review (AQR), giving a deadline of March 2017 for the same.

Market will closely track whether Rajan expects the mess in the banking sector to be swept off or spill more in the coming quarters.

ALSO READ: Rs 11,470 crore loss in Q4 just a trailer! More pain ahead for banks 

5) Last, but certainly not least: Rajan's second term

Of course, the policy review would say nothing about Rajan's second term in office, but press conference post policy release would certainly focus on somehow fetching cues on what he himself thinks about his second term.

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