Monetary Policy: RBI may cut rates by 25 bps; CPI target keenly watched

According to a CNBC-TV18 poll among market participants, 70 percent believe that the Reserve Bank of India will slash key rates by 25 basis points in February 8's Monetary Policy meet, while the rest say the rates will remain unchanged. All eyes will be on the Governor Urjit Patel's commentary on the inflation target and how he approaches the ultimate CPI goal of 4 percent.Last year the inflation target was set at 4 percent until March 2021 with 6 percent as the upper limit and 2 percent as the lower.The Consumer Price Index (CPI) based inflation came down to 3.6 percent in December due to decreased spending by cash strapped citizens in the aftermath of demonetisation. This figure is lower than the Urjit Patel's target of 4 percent, which he had stressed on in the last meet.The market will be keenly watching RBI's guidance on inflation estimates for financial year 2018 and RBI's view on the India's gross domestic product (GDP) in the current and next fiscal.According to the poll, the cash reserve ratio (CRR) is going to remain unchanged. Around 40 percent of the respondents, going by the poll, suggests that the RBI may slash repo rate a total of 25 basis points in 2017, while the rest believe RBI to cut by 50 basis points this year."Going by our estimates of around 5.5 percent inflation by the end of December this year, the RBI may be looking at two rate cuts, with one in the upcoming meeting," says Sanjay Mookim the Director of India equity strategy at BofA ML.Around 60 percent of the street favours a change in the March 2017 inflation target of 5 percent to 4.5-4.9 percent while the rest feels it may remain unchanged.Also, only 20 percent of the market experts feel that next fiscal's inflation may hover above the 5 mark at around 5.1-5.5 percent, while the remaining feel it would remain well below 5 percent.Most (around 70 percent) say the RBI will not cut rates if it aims for a 4 percent CPI inflation by the start of FY18. But they also predict that RBI will not be giving any timeline to reach its target of 4 percent inflation in the meet.There is a consensus among the respondents that RBI's stance on neutral liquidity will remain unchanged.