The Reserve Bank of India is likely to cut the repo rate by a further 25 basis point by the end of the year, said private lender HDFC Bank Ltd., citing a decline in inflation in the same period.
The central bank's stance was more dovish than expected, the bank said in a report titled 'RBI Watch: Meeting of the Doves'. The unanimity in the decision of the monetary policy committee shows that members can take a comprehensive data-dependent approach to the problem at hand. It also highlights the central bank's need to support growth, given the large output gap and soft inflation.
HDFC Bank expects retail inflation to fall below the 4.5 percent level by December, thanks to a decline in food prices.
If the decline in food inflation is more than expected and if the global markets remain stable around the Fed's decision in December, another 25 bps cut in the repo rate could come as early as the next monetary policy review of the RBI.HDFC Bank report
House Rent Allowance Hike Risks Downplayed
The RBI appeared less confident about the inflation trajectory in 2017-18 and said the direct and indirect impact of an increase in House Rent Allowance as part of the Seventh Pay Commission awards may require a tightening of monetary stance.
But the governor pointed out in his interaction with the press that the RBI could look through the initial and direct impact of HRA hike going forward.
This gives us comfort that the RBI in the future could ignore one-off cost pushes or supply shocks unless there is a significant risk of the shock getting generalized and percolating through the system.HDFC Bank report
On Real Interest Rate
A monetary policy committee member said the real interest rate has room to go below the current level of 1.5 percent by 20 to 30 basis points. This is lower than the 1.5 percent to 2 percent level propagated by the central bank till now, the private lender said.
While there is some risk to financial savings from a lower target real interest rate, there is clearly a trade-off involved. Past data has shown that financial savings have remained robust even at real lower rates of interest and some reduction in the real rate given sluggish growth conditions is warranted.HDFC Bank report
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