The fiscal discipline plan laid out by finance minister Arun Jaitley in Budget 2016-17 has raised hopes of an interest rate cut by the Reserve Bank of India.
“The RBI should be satisfied with the finance minister’s announcement on the fiscal deficit target, and the quality of expenditure and revenues. This should get a room for the RBI to cut repo rate by 25 basis points (bps),” said N S Venkatesh, CFO of IDBI Bank.
Repo is the rate at which banks borrow from the RBI. A cut in repo rate can lead to banks reducing their lending rates benefitting the borrowers.
In his budget speech on Monday, Jaitley had said that the government will adhere to its fiscal deficit target of 3.5% for 2016-17.
“The RBI is likely to continue with its accommodative stance and may go for a 25 basis points rate cut,” an HSBC report said.
“The RBI has to consider that (rate cut) given the fact that CPI (consumer price index) is coming in below what they had indicated to be the glide path and given that fiscal discipline is being maintained. So definitely this is something that the RBI will be thinking about,” SBI chairperson Arundhati Bhattacharya said.
The CPI or retail inflation stood at 5.69% in January, lower than the RBI’s estimate of 6%.
“This (sticking to the fiscal deficit target) is very positive for interest rates. As a follow through of this, I expect the Reserve Bank of India to consider dropping of interest rates and repo rates sometime in March,” Kotak said.
Anubhuti Sahay, head, South Asia economic research, Standard Charted Bank, said: “The RBI will reduce the repo rate at its April 5 policy meeting, if not sooner.”