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All eyes will be on RBI

The market expects RBI Governor Raghuram Rajan to cut rates by at least 25 basis points. The only hindrance this time could be the rupee, hovering at 64-levels against the dollar.

twitter-logo Mahesh Nayak        Last Updated: June 1, 2015  | 10:25 IST
RBI Governor Raghuram Rajan

Mahesh Nayak
On Tuesday, June 2, the Reserve Bank of India (RBI) will review its monetary policy. Unlike last time when the market wasn't expecting RBI governor to cut rates, this time majority of the market expects Raghuram Rajan to oblige the Street with a rate cut. Sentiments across reveal expectations of at least a 25 basis points (bps) cut in repo rate.

Looking at the domestic and global scenario, there seems to be a high probability of a rate cut.

One of the most important factors is the likelihood of US Fed postponing the hike in interest rate due to a weak US economy. Also the bond volatility in US and Europe has already given an indication that the market is not prepared for a rate hike and it can impact the financial market. The other reason being steady domestic scenario in terms of government finances as well as inflation data.

What could restrict the RBI from cutting rates is the rupee that is hovering close to 64-level against the dollar. If it would not be for the weakness in the Indian currency or if RBI is confident to control the weakness in the rupee, it can go ahead with the rate cut.

If RBI obliges the Street, it will give an indication that the central bank doesn't expect upside risk of food inflation nor does it expect the US to hike rates in the immediate near-term in 2015 and thus it has room for rate cuts.

A rate cut would be a positive indicator for the market which is waiting for triggers.

Though one may feel that a 25 bps cut, if it happens on Tuesday, is a signal of more is coming, but it is not sufficient to push the slowing Indian economy. What is necessary is at least a 125-150 bps cut over the next few quarters to revive the economy. But it is not likely and no one in the market is expecting such huge cuts due to concerns over inflation as well as pressure on rupee.

RBI has also maintained its stance that it will curtail inflation even if growth takes a back seat, but somewhere RBI and government will have to strike a balance between inflation and growth. The central bank may wait for signals from the monsoon before it goes for rate cuts in the future.

Some believe Rajan should adopt the YV Reddy way of differential capital adequacy requirement for different sensitive sector. This will discourage lending in different sector or overheating. This was used by Reddy and he used it effectively to get best out of the monetary policy.

Meanwhile in the coming week the market will also keep a close eye on the progress on monsoon, macro-economic numbers as well as on sale numbers from auto companies for the month of May 2015.

On Monday, June 1, 2015 Markit Economics will unveil HSBC Manufacturing PMI data for May 2015. The HSBC India PMI had declined to 51.3 in April 2015 from 52.1 in March 2015. On Wednesday, June 3, 2015 HSBC India Services PMI will be out for May 2015. The HSBC India Services PMI Index had also declined in April 2015 to 52.4 from 53 in March 2015.

Global events will also be closely watched during the week. Some of the major events will be China HSBC Manufacturing PMI and China HSBC Services PMI for May 2015, Eurozone unemployment rate for May 2015 and US unemployment data for May 2015.

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