Stock markets tank after central bank hints at limited room for more rate cuts, IMD forecasts deficient monsoon
Mumbai/New Delhi: BSE’s benchmark Sensex fell 660 points at the close on Tuesday after the Reserve Bank of India (RBI) indicated that there was limited room for future rate cuts (after cutting the policy rate by 0.25 percentage points) and the India Meteorological Department (IMD) downgraded its monsoon forecast to “deficient”.
RBI governor Raghuram Rajan may have termed the announcement a Goldilocks policy, “neither conservative nor aggressive... Just right given the current situation”, but it was anything but a fairy tale as far as the markets were concerned.
The Sensex fell 2.37%; bond prices fell and yields on 10-year bonds (they move counter to prices) jumped to 7.72%; and executives who had been clamouring for a larger cut rued what they saw as a missed opportunity by Rajan to strike a decisive blow for growth.
Rajan did hold out hope—“We have used the available room...we have to wait for the data to give us more room”—but by Tuesday evening, any prospect of an eventual happy ending had vanished in the shadow of IMD’s forecast. The weather office downgraded its long-range monsoon forecast to 88% of the 50-year average and doubled the probability of a deficient monsoon from the April forecast.
RBI’s guidance on future rate cuts and the forecast once again put the onus on the government, which has to contain inflation even as it seeks to alleviate rural distress.
A poor monsoon will delay an expected (and much-awaited) economic recovery, and result in a spike in inflation. RBI said it sees retail inflation at 6% by January next year, compared with its previous estimate of 5.8%. It cited a weak monsoon, a rebound in oil prices, and global volatility as possible factors. Rating agency Crisil reduced its expectations of gross domestic product (GDP) growth this year to 7.4% from 7.9% after IMD’s forecast.
If the rains are deficient this year, it will be the second successive year they are so. The four-month monsoon season is critical to the prospects of agriculture and the rural economy. Around 60% of India’s agricultural land is dependent on the rains and at least 70% of the country’s annual rainfall happens in this period.
“If IMD’s forecast comes true, it will mean a drought in many parts of the country and another bad year for agriculture,” said Ramesh Chand, director of the National Institute of Agricultural Economics and Policy Research and a member of the National Task Force on Agriculture under the NITI Aayog.
That could worsen the agrarian crisis.
Last year’s kharif (monsoon) crop was affected by a drought in Maharashtra, Telangana, Andhra Pradesh, Uttar Pradesh and Haryana. The rabi (winter crop) harvest was ruined by unseasonal rains in March and April ahead of the harvest.
“The 7.5% (GDP) growth rate will be hard to realize” in this context, said T. Haque, director of the Council for Social Development, Delhi, and a former chairman of the Commission for Agricultural Costs and Prices.
RBI said sustained weakness in consumption spending, especially in rural areas, continues to be a drag on the economy.
“Banks have started passing through some of the past rate cuts in their lending rates, headline inflation has evolved along the projected path, the impact of unseasonal rain has been moderate so far, administered price increases remain muted, and the timing of normalization of US monetary policy seems to have been pushed back. With low domestic capacity utilization, still mixed indicators of recovery, and subdued investment and credit growth, there is a case for a cut in the policy rate today,” RBI said in its statement, explaining that the rate cut is “front-loaded”.
At a press conference following the policy announcement, Rajan once again nudged banks to cut their own rates, pointing out that while deposit rates have come down, lending rates have not.
Banks took the cue.
The country’s largest lender State Bank of India (SBI) reduced its minimum lending rate, or base rate, by 0.25 percentage point to 9.7% effective 8 June. In April, following the monetary policy review, the bank had cut its rate by an identical amount.
Arundhati Bhattacharya, chairperson, SBI, said that with “credit demand expected to perk up”, the cut in the policy rate “will transmit through the banking system sooner than later”.
Still, RBI’s rate cut, its statement that the government needs to do its part on food policy and management to keep inflation down, and the monsoon forecast indicate that the rate cut cycle may be over—for now.
“Having front-loaded easing, India’s rate-cutting cycle is now most likely over, with only a renewed plunge in international oil prices likely to create the space for any further easing from here,” Richard Iley, chief Asia economist at BNP Paribas SA, said.
For a government keen to revive growth, that isn’t good news. Then, the government’s efforts are likely to be concentrated on addressing the agrarian crisis. Haque claimed the government has been slow to respond. “It has not even addressed long-term issues such as public investments in irrigation or a comprehensive crop insurance scheme,” he said.
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