Credit Policy - No expectation of rate cut this time: CARE

CARE Ratings' report on the expectations from the credit policy to be announced on February 3rd 2015

The RBI is to announce the credit policy on the 3rd of February 2015. This would be against a backdrop of a 25 bps rate cut invoked on 15, January 2015. The reduction in interest rates earlier this month is based on the premise that the inflation number has come down and would remain range bound in the next few months. It may be recollected that the RBI had targeted a CPI inflation target of 8% for January 2015 and 6% for January 2016. While the inflation number has increased in December relative to November, it is within these broad targets.

CARE’s view is that since there has been no new development in the economy between the earlier rate cut announced and the policy date, there is no expectation of a rate cut this time. However, we do not rule a further cut of 25 bps in case the RBI has in mind lowering the rates substantially by 50 bps in Q4-FY15, with the January rate cut being the first tranche.

RBI has been targeting inflation for conduct of monetary policy and as can be seen, both the indices have been moving downwards. While the January number could move upwards given that the high base effect has become weak, the CPI inflation rate would continue to be in the 5-5.5% range to provide comfort that inflation would rein low. Global commodity prices continue to remain low especially crude oil which gives comfort that inflation will be range bound in the downward direction. A concern however is still on the food side as the rabi sowing data indicates that the area under cultivation up to 23rd January was 6% lower at the aggregate level with lower levels across wheat, coarse cereals, pulses and oilseeds. This factor will be looked at closely by the RBI to gauge the potential impact on future inflation.

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