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Rediff.com  » Business » Don't expect any more rate cuts in 2015

Don't expect any more rate cuts in 2015

By Malini Bhupta
June 03, 2015 10:18 IST
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RBI to keep an eye on monsoon, oil prices and US Fed moves.

After cutting the policy rate by 75 basis points in less than five months, the Reserve Bank of India (RBI) is headed for a prolonged pause.

Despite the central bank cutting the rate by 25 basis points on Tuesday, currency, fixed-income and equity markets reacted negatively, as many believe there might not be any more action on this front this year; the market expects a pause till 2016, at the least.

Pranjul Bhandari, chief India economist at HSBC, says in the event of an irregular monsoon, Tuesday’s rate cut will be the last, for now.

From here, the central bank will monitor the progress of the monsoon, as well as the monetary policy manoeuvres of the US Federal Reserve.

Several factors could impact the Indian economy adversely and it seems the central bank does not want to take chances.

The biggest risk seems to be deficient rainfall.

Though the past 10 years do not show any clear correlation between rain and market returns, this year could be different.

The bond market has remained range-bound, given the perception of rising risks.

If rainfall is deficient for a second consecutive year, it could have an impact on food prices.

It is for this that RBI has revised its inflation projection for January 2016 from 5.8 per cent to six per cent.

The growth estimate for FY16 has been lowered from 7.8 per cent to 7.6 per cent, with a downward bias.

Inflation expectations, remain elevated, as food prices remain high.

Food prices, which have increased about 11 per cent a year for the past five years, have contributed significantly to higher inflation.

Three key factors — rain, oil prices and weakness in the rupee — are likely to play out through the next six months.

The central bank will have clarity on these risks only after December this year.

Other than the onset of the monsoon, RBI will also consider oil prices and the commentary of the US Federal Reserve.

Given the below-estimate growth in the US in the March quarter, there is no clarity on whether the US Fed will delay a decision to normalise policy rates from September.

Siddhartha Sanyal of Barclays says weakness in the bond and equity markets will likely limit the rupee’s ability to strengthen substantially in the short term.

Barclays believes it is a matter of time before the rupee resumes a gradually weaker trajectory.

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Malini Bhupta
Source: source
 

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