One Last Rate Cut In The Offing, Shows BloombergQuint Economists’ Poll

While the RBI may sneak in one 25 basis point cut, rates are unlikely to fall much further

The Reserve Bank of India (RBI) building stands in Kolkata (Photographer: Brent Lewin/Bloomberg)
The Reserve Bank of India (RBI) building stands in Kolkata (Photographer: Brent Lewin/Bloomberg)

Lower headline inflation and prudent fiscal policy from the government are likely to tip the scales in favour of a rate cut at the Reserve Bank of India’s monetary policy review on Wednesday, said economists polled by BloombergQuint.

Of the 13 economists polled, 61.5 percent (or 8 economists) are expecting the central bank to cut repo rate by 25 basis points. One basis point is one-hundredth of a percentage point. While no respondent expected a cut higher than 25 basis points, there were at least five people who said that the central bank may choose to hold rates in the light of global uncertainties and sticky core inflation.

Among them is DK Joshi, chief economist at rating agency CRISIL who said there is a “50-50” chance of a rate cut in the upcoming policy review. The RBI might just decide to hold rates for a bit and watch how the economy performs in the coming quarter or two, said Joshi.

The monetary policy committee will meet for the third time since its inception on Tuesday and Wednesday. Chaired by RBI Governor Urjit Patel, the six-member committee will deliberate on interest rates and announce its decision at 2.30 p.m. on Wednesday.

Saugata Bhattacharya, chief economist and vice president at Axis Bank told BloombergQuint that the RBI may hold rates right now but sneak in one rate cut before the calendar year ends.

Bhattacharya highlighted that core inflation has proved to be sticky and that may worry the RBI.“The average inflation observed is more than 4 percent and the central bank’s first priority would be to contain that while watching other incoming indicators,” he said.

One Last Rate Cut In The Offing, Shows BloombergQuint Economists’ Poll

Demonetisation is likely to pull down economic growth in India to between 6.75-7.5 percent in fiscal 2018, said the economic survey released by the government this month. It expects growth in fiscal 2017 to be 0.25-0.5 percent below the official estimate of 7.1 percent. The RBI’s own forecast pegs GDP growth at 7.1 percent in the current fiscal. It will present its forecast for FY18 in the April policy review.

While the central bank will take any expected slowdown due to demonetisation into account, it has so far maintained that the hit will be transitory. Along with growth, the RBI will be trying to assess the future course of retail inflation which fell to 3.41 percent in December compared to 3.63 percent in November. Inflation is currently well below the RBI’s target of 5 percent for March 2017. It is mandated to maintain inflation in a band of 4 percent (+/- 2 percent) under the new monetary policy framework.

Abheek Barua, chief economist at HDFC Bank is betting on a 25 basis points cut in the repo rate this time as he believes that room for a rate cut in the future might be limited.

Also Read: Strong Case For RBI To Cut Rates Now, May Not Have Room Later

“Demonetisation might not have wrecked the economy but has caused some deceleration. Some of this could be reversed through cash-replenishment but a helping hand from lower interest rates is welcome,” Barua wrote for BloombergQuint on February 4. Barua added that global commodity prices are rising and concerns over global trade policies may constrain the RBI in the coming months.

Samiran Chakraborty of Citibank agrees with the call of another 25 basis point rate cut but differs in the timing of the cut. He sees the RBI wait until April before cutting rates. A contained fiscal deficit would seal the case for atleast one more rate cut in this cycle.

The better than feared deficit target and commitment to fiscal consolidation will keep hopes of a RBI rate cut alive... While the timing of RBI cuts remains uncertain, investors are now unlikely to question the possibility of one 25 basis point rate cut that is currently priced into the OIS (overnight indexed swap) curve.
Samiran Chakraborty, Chief Economist - India, Citibank

The current rate cutting cycle, which began at the start of 2015, has seen the benchmark policy rate being slashed by 175 basis points. Most economists expect the cycle to close with another 25 basis point cut, be it in February or April.

The BloombergQuint poll found that only 30 percent of the respondents expected a rate cut beyond 25 basis points. Those who said that deeper rate cuts were possible, agreed that if inflation conditions worsen, the RBI would stay away from more rate cuts.

One Last Rate Cut In The Offing, Shows BloombergQuint Economists’ Poll

While the RBI’s ultimate objective is to bring inflation down to 4 percent, it hasn’t specified a period over which this target will be achieved.

In a note released on Monday, Pranjul Bhandari, chief economist at HSBC Securities and Capital Markets said that a likely 25 basis point rate cut is a close call in February. Bhandari wrote that the RBI may choose to target inflation in a range of 4-5 percent till private investment picks up. This may leave room to bring the benchmark repo rate down to 6 percent from the current 6.25 percent.

We have found in earlier research that of all its drivers, investment is most sensitive to policy uncertainty. And the demonetisation and questions around what may follow next may have just raised the uncertainty ‘quotient’. By continuing with the “accommodative stance” and restating once again that the RBI is open to cutting rates if and when the space opens up, the central bank could do its counterbalancing bit.
Pranjul Bhandari, Chief Economist, HSBC Securities and Capital Markets
One Last Rate Cut In The Offing, Shows BloombergQuint Economists’ Poll