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Will RBI cut interest rates further?

By Malini Bhupta
March 11, 2015 08:39 IST
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Central bank has cited trend of global easing and weak growth for its anticipatory rate cut

The Reserve Bank of India has delivered two successive rate cuts this year, thus, taking repo rate down to 7.5 per cent. While rates were expected to ease this year, the cycle was expected to be shallow with 50 basis point being cut through calendar 2015, on risks emanating from a possible rate hike by the US Federal Reserve.

But the breakdown of oil and the rising risks of deflationary pressures have given the central bank more space to cut the repo rate by 50 basis points in less than two months. The central bank has cited the trend of global easing and weak growth for its "anticipatory" rate cut.

The question that everyone's asking is how many more rate cuts are likely? As always economists are a divided lot on this. While the cautious ones expect the RBI to cut another 25 basis points by June and then pause, there is a segment that's more aggressive and expects another 50 basis points before the US Fed starts its own tightening cycle later this year.

HSBC Global Research believes that the RBI has space for one more 25 basis point rate cut, which could materialise in the June policy meeting. Crisil Research expects another 50 basis points, as does the rest of corporate India, next fiscal - with a high likelihood they would be front-loaded.

Economists believe that the rationale RBI has given for rate cut is rather weak and it has merely done it to coax the government into approving the monetary policy framework recommended by it. Sonal Varma, chief India economist of Nomura, expects a terminal repo rate of 7.50 per cent until-2017 (no further rate cuts).

However, she still sees a risk of another 25 basis point cut. If the rate cuts are more than this then economists believe the RBI would have to start increasing rates, if inflation starts rising again.

But Morgan Stanley -- which was accurate in its predicting the second rate cut after the Budget -- expects the RBI to cut (rates) by a further 100 basis points through 2015, with the next move happening during the April 7 meeting.

Chetan Ahya and Upasana Chachra of Morgan Stanley base their forecast on the rationale that RBI will target real rates of 175 basis points and, thus, inflation trajectory would be critical for further rate cuts. They expect inflation to slow to 4.75 per cent by end of 2015, which would result in rate cuts of 100 basis points.

Even as nobody is ruling out another rate cut in the new fiscal, under the new monetary policy framework, the government has its work cut out. If prices and fiscal deficit are not reined in, RBI may be forced to reverse its rate action next year.

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Malini Bhupta in Mumbai
Source: source
 

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