Central bank RBI unlikely to cut rates further, say experts
The market is rife with speculation that the Reserve Bank of India (RBI) may keep rates unchanged in its fifth bi-monetary policy review on December 1, while persisting with its accommodative stance as retail inflation will remain well within the targeted 6% by January 2016.
This would be a marked change in the central bank’s policy that had reduced the repo rate — the rate at which banks borrow from the central bank — by 50 basis points in the previous monetary policy review in September, citing comfortable ease in inflation
“We expect RBI to pause on Tuesday, (December 1) given the 50 basis point cut last time. He should cut a final 25 basis points in February,” said Indranil Sen Gupta, India economist for DSP Merrill Lynch. “We see little headroom to cut rates after this... If we use medium-term about-7% CPI inflation as a proxy for inflation expectations, policy rates, at 6.75%, are already negative.”
During the September policy review, the RBI governor had explained the central bank’s stance to the modest pick-up in growth momentum in the first half of 2015-16, which was attributed to soft commodity prices, disinflation, comfortable liquidity conditions, some de-clogging of stalled projects, and higher capital expenditure by the government.
Underlying economic activity, however, remains weak on account of sustained decline in exports, rainfall deficiency and weaker-than-expected momentum in industrial production and investment activity, the central bank had said.
According to brokerage firm CLSA, there is limited room for additional rate cuts from the RBI. “Thanks to the collapse in global commodity prices, CPI inflation has declined faster and more than the RBI’s glide path towards the 4% medium-term target indicated. However, investors are underestimating the challenges to achieving the ambitious 4% target by early 2018,” it added.
The RBI has cut the repo rate by 125 basis points to 6.75% this year. Of these, financial markets expected a 25 basis point cut in September, but the RBI delivered a stronger 50 basis point reduction.
Meanwhile, RBI governor Raghuram Rajan met finance minister Arun Jaitley on Friday ahead of the monetary policy review.