RBI policy: BofA ML expects a 25 bps rate cut tomorrow

In an interview to CNBC-TV18, Indranil Sengupta, chief economist India, BofA ML says, he is hoping for a 25 bps rate cut tomorrow. "Then we expect the RBI to go on pause till December and cut 75 bps again by March," he adds.

Below is the edited transcript of his interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee.

Q: Is it fair to expect no move from Reserve Bank of India (RBI) tomorrow?

A: I am hoping for a 25 bps rate cut tomorrow. And then we expect the RBI to go on pause till December and cut 75 bps again by March.

Q: What is the rationale for this 25 bps cut expectation?

A: First, growth is going to be much slower than the RBI’s 7.3%. With a draught, our estimate would be 5.8%. So, slowing growth clearly calls for lower lending rates.

Secondly, core inflation is likely to remain benign at 5% or thereabouts. Yes, headline inflation could hit 8-9%, if you get a draught, if the government finally hikes diesel prices. But you are not going to be able to control that through monetary policy.

If you look at the draught of 2002, the RBI cut through the draught of 2002. If you look at the draught of 2009, the RBI kept rates benign at 3.5% through the draught of 2009. So, this is the first time you can face a draught with high lending rates. So that is the other worry.

Finally, I think somewhere down the line, the rupee also needs the support of lower rates because clearly that is the expectation for which equity flows have come that at some stage, rates will come off and you get growth back. So, if we have a draught, it will get much more difficult to cut rates later. So that is why I think that we could look at a preemptive rate cut tomorrow.

Q: What about the fiscal side? Presidential elections have come and gone, there has been no adjustment in diesel prices, international crude has gone back to USD 107 per barrel. Do you think that may stay the RBI’s hand?

A: The fiscal side will remain a worry. If you wait for the fiscal side and kill growth, things will get worse because tax collections will fall. So, yes, we also do expect a diesel price hike, but the point is that if growth worsens then the fisc will worsen further.