CARE expects 25 bps rate cut in monetary policy post budget

CARE Ratings' analysis on RBI credit policy

After cutting the repo rate by 25 bps in January 2015, the Reserve Bank of India decided to keep interest rates unchanged at the credit policy announcement today. Consequently, in line with CARE’s own expectation, the repo rate stands unchanged at 7.75%. Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since January, RBI’s stance of maintaining the current interest rate seems reasonable. The RBI has spoken again of fiscal consolidation which gives the impression that it will use the Budget as the next point of reference before taking any further action in interest rates. RBI is cognizant of the fact that the CPI inflation number could be higher this season and will have 2 additional reference points before taking a decision in April. We expect RBI to reduce the repo rate by 25 bps in the post budget policy, provided the inflation numbers for January have moved in downward direction. Based on ceteris paribus conditions we still expect rates to be cut by another 75 bps this calendar year.

RBI has been speaking of a range of 1.5-2% for real interest rates which can hence give one an idea of when the repo rate will be cut based on the prevailing CPI inflation number during the course of the year.

The GSec yields have been range bound between 7.5-7.7%. The growth in deposits is expected to slow down owing to once the payments are made for the disinvestment programme. A pickup in credit is also expected because of the coming spectrum sale which will result in enhanced demand for credit. Hence rates would tend to move upwards during March when the advance tax payments are due.

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