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Last Updated : Feb 06, 2017 05:29 PM IST | Source: Moneycontrol.com

RBI has room to cut rates by 25 bps this time: Economists

With the impact of demonetisation still being felt inflation under control, the six-member Monetary Policy Committee will likely recommend a reduction of 25 basis points in key policy rate, feel economists.

 
 
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Beena Parmar
Moneycontrol

With the impact of demonetisation still being felt and inflation under control, the six-member Monetary Policy Committee will likely recommend a reduction of 25 basis points in key policy rate, feel economists.

Most economists Moneycontrol spoke to believe the key policy rate -- repo rate -- will be cut to 6 percent when the RBI Governor announces his third policy review on February 8.

CPI-based inflation has been under control in November and December last year, two key months during which the cash ban impact led to reduced consumption. Consumer prices cooled to 3.63 percent in November, and slipped further down to 3.41 percent in the following month. 

It is believed that RBI will have more room to reduce benchmark rates following the government's goal to keep the fiscal deficit target at a more reasonable 3.2 percent of the GDP in FY18. Another reason why a rate cut is deemed ideal is because economic growth for this fiscal year has been lowered by 25-50 basis points compared to the baseline growth assumption of 7 percent.

For 2017-18, the government’s Economic Survey expects real GDP growth to be in the 6.75-7.5 percent range.

Rupa Rege Nitsure, Group Chief Economist at L&T Financial Services, said, “The RBI should frontload the rate cuts on February 8 and reduce the key repo rate by 50 bps for it to have any meaningful impact on the borrowing costs of entities who wish to borrow from the corporate bond market. Three factors supporting this move are - acute economic slowdown, benign inflation and the government's fiscal discipline [target]."

Nitsure also cautions that RBI should undertake a rate cut in this policy meet as going forward, it will be difficult for the regulator enforce cuts.  She flags monsoon-related uncertainty and global risks as limiting factors.

Echoing a similar view, Shubhada Rao, Chief Economist of Yes Bank, said that the fiscal year-end target for inflation will be about 60 bps lower than the given target of 5 percent by March 2017 and till such time that there is scope to cut rates, the RBI would want to use the opportunity.

Also, given that the US central bank may further hike interest rates, the RBI would look at frontloading the cuts in the easing interest rate cycle. Rao expects 50-bps cut in this cycle until April 2017.

Taking a contrarian view, a few economists also suggest that the banks have already been transmitting the past rate cuts by up to 90 bps since December last year. Additionally, as the country’s projects are still stuck with excess capacity and the RBI's intention to move towards a neutral liquidity scenario [no surplus, no deficit scenario], the regulator may want to wait for further data on the global front.

Saugata Bhattacharya, Chief Economist at Axis Bank, said, “Looks like the RBI will hold rates this time. There is still global uncertainty around oil and commodity prices, and even around the US President Donald Trump’s policies. Hence, it is likely that the RBI will defer a decision of a 25 bps rate cut to April…The only possibility of a rate cut in February could be due to lower inflation numbers.”

At the first meeting of the Monetary Policy Committee (MPC) in October, the RBI reduced its policy rate by 25 bps to 6.25 percent. Subsequently, in December, the RBi surprised markets with a pause.

A basis point (bp) is one hundredth of a percentage point.



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First Published on Feb 6, 2017 02:44 pm
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