The first bi-monthly monetary policy of RBI is scheduled to happen on April 05, 2016. Post budget, there’s a sort of consensus among market participants as far as policy action goes. They are expecting the RBI to cut policy rates. Bond yields and equity indices suggest that the markets have probably factored in 25bps rate cut. PersonalFN does not encourage speculation on any particular event, but for your better understanding, it presents in this article an analysis of factors that point to a probable rate reduction.

In the Financial Year (FY) 2015-16, especially just before the Budget 2016-17, the RBI had provided guidance on what it may consider before a rate reduction. RBI expected the Government to infuse adequate capital into the Public Sector Banks (PSBs) to help absorb losses. In the run up to Budget 2016-17, the RBI expected the Government to exercise caution with spending. The RBI Governor did not quote a specific number while responding to a question on the fiscal deficit. Instead, he advised that the budget should be looked upon as a package.

Before that, the RBI had made it clear that the transmission of the benefits of past rate cuts into the economy had been one of the significant pre-conditions for further rate reductions, apart from the pace of growth and level of inflation.Due to lack of monetary transmission through banks, it kept policy rates unchanged at its December-review.

Why there are likely chances that RBI may lower policy rates?
 

• The government has provided Rs 25,000 crore towards capital infusion into the Public Sector Banks (PSBs). This is expected to help banks absorb losses and relieve some stress of bad loans on their balance sheets.
   
• To remove supply side constraints such as inadequate infrastructure, posing a threat to inflation, the Government has been working on better connectivity. It has proposed to spend Rs 55,000 crore on roads and highways.
   
• The Government has provided higher budgetary support to pro-farmer schemes. It has allocated more money to improving irrigation facilities and has prepared a plan to ease the distress of farmers by launching comprehensive crop insurance schemes. It has been observed that abrupt rises in the price of a few food articles led to higher consumer inflation. The Government has been planning to increase Minimum Support Prices (MSPs) for sensitive commodities such as pulses.
   
• Furthermore, the Government has allowed 100% Foreign Direct Investment (FDI) through FIPB route in the marketing of food products produced and manufactured in India. This is intended to benefit farmers and give an impetus to the food processing industry and creating employment in the sector.
   
• As the Marginal Cost of Funds based Lending Rate (MCLR) has become applicable from April 01, 2016, the cost of borrowing has started to go down. Bank of Baroda, SBI and HDFC banks among others have already begun re-pricing their short term loans.
   
• A private weather predictor, Weather Risk Management services, has forecasted 5%-10% above normal monsoon this year. Although the official forecast by the Indian Meteorological Department (IMD) is still awaited, early predictions by the private forecaster have kindled the expectations.
   

PersonalFN advocates not making any decision based on the speculation about investments and the policy rate cut. Instead, continue to focus on long-term financial goals and invest as per asset allocation designed to achieve your financial goals.
 

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ravikumar_patil@taaltech.com Jun 24, 2016 HI,   i am one of  the person invested in canara bank mutual fund direct growth, can i move that amount (50,000), from mutual fund to ppf in canara bank itself,  is the option possible.... please let me know, Rgds Ravi patil

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