RBI Policy Today: Citi Sees Quarter Point Rate Cut Under New Central Bank Chief

Citi Research expects a 25-basis-point rate cut in the upcoming Reserve Bank of India's Monetary Policy Committee meeting outcome as the government's fiscal prudence provides space for rate easing.

The government continuing with its path of fiscal consolidation provides space for this monetary easing, according to Citi. Only a minority of market participants expects a pause due to global uncertainties while tight liquidity could impede the transmission of cuts, Citi said in a note on Feb. 05.

Analysts at the brokerage noted that the overnight rates have already fallen towards the policy rate and transmission would be automatic for external benchmark lending rate loans.

On the global uncertainty front, Citi said, capital flows into India are more growth-sensitive than interest rate-sensitive. It added that rate cuts could be seen as supporting growth recovery. 

Of the 28 economists polled by Bloomberg, 24 expect the MPC to cut the repo rate on Friday. SBI Research expects two 25-bps rate cuts from February to April.

This is the first MPC meeting after the appointment of RBI Governor Sanjay Malhotra and the re-designation of Rajeshwar Rao in the monetary policy department, and the second MPC meeting for the three external members — Ram Singh, Saugata Bhattacharya, and Nagesh Kumar.

Citi said that the growth-inflation view will determine market pricing of the quantum of rate cuts. "We don’t expect any further liquidity announcement at the MPC meeting itself." Relaxation of macro-prudential measures and any signs of comfort on credit growth will be the key to watch out for, according to Citi.

Global uncertainties concerning currency moves and RBI's consideration that the current liquidity situation is not conducive for a smooth transmission might trigger a pause in rates, Citi said. "We are more sympathetic to this view as interest rate cuts are thought to be accentuating the currency depreciation pressure."