Economists are of the view that a ‘turnaround time’ has come when the RBI should take a long hard look at the policy setting rate and move proactively.

Some of them say that the central bank should take good care that it does not risk itself falling behind the curve the next time it meets.

Abheek Barua, Consultant, ICRIER , is firm in his view that conditions are in place for a rate cut.

“Maybe they want to be a little more sanguine about the numbers before they actually go in for one,” he told BusinessLine .

“But you know the risk.. if you keep waiting and falling behind the curve. For one, we are getting enough signals of a sustained decline in global commodity prices.

"The fisc might look bad at this stage. But it should get better going forward. So its time to move, come February. And it would be just wise to do that.

“I think we all know that the Government is reasonably committed to fiscal consolidation. So waiting for additional signals often increases the risk of not taking the optimal decision in time.

"I just wish that the RBI gets its act together and takes advantage of the very benign environment to go forward.”

Bond yields

As for bond yields, Barua expected them to go below eight 8 per cent, going forward.

“But I guess that during the first quarter of the calendar year, which is the last of the fiscal year, what will be dominant is the market expectations of what the US Fed does. That would determine whether they yields would move further down or not.”

Saugata Bhattacharya, Senior Vice-President and Chief Economist, Axis Bank , said that Monday’s review signalled a significant shift in policy stance.

"The RBI is beginning to become quite comfortable with the pace of disinflation. The sense from the policy is that the disinflation trend will sustain. And that will further help with the policy decision to go easy."

Budget and expenditure

As for the Union Budget as a marker, he agreed and said that it would give you a sense of what are some of the key tax and expenditure measures.

"The quality of expenditure will definitely have a role in RBI’s decision. And the extent of fiscal consolidation will be on top of the mind when the policy-making body convenes next.

"How fast the government is willing to go to consolidate finances, whether it would achieve the 4.1-per cent target in terms of fiscal deficit, what kind of expenditure cuts and expenditure changes are being brought into place, and how it deals with the subsidy delivery mechanism will also have a say on RBI’s decisions in future.

"It is perhaps difficult to take a call on bond yields but suffice to say that we should be prepared for a 50 bps cut in rates "sometime in the near future", Bhattacharya said.

Clear change in stance

Subhada Rao, Senior President and Chief economist, YES Bank , too agreed that in terms of guidance, Monday marked a clear change of stance from the RBI.

"Clearly, there’s no rate change today but it has been made up adequately by the accompanying dovish statement.

"The sense is that the rate cut could come as early as in February; with some betting on the odds of a decision to come outside the rate review cycle.

“But this is not our call yet but we put significant probability of the rate cut happening in February.

“There is the greater comfort on the subtle nature of the crude oil prices correction and therefore there is clearly the momentum suggesting the probability.

75 bps cut?

“I think by and large we can feel the growing comfort for the RBI in terms of inflation trend, which has given the Governor the context for sounding dovish. We’re looking for a 75 bps cut in rate in February.

"Budget comes later in February but I think we can expect a cut prior to the budget. RBI sits next as early as on February 3 when we expect a rate cut.

“Our call for bond yields was that by March the yields would settle around 7.90 per cent but give the pace at which the bond yields have corrected today we may review our call.

“Obviously there’s a downside than upside risk to our bond yields call of 7.90.

"It was interesting to listen to what the Governor was saying in terms of building the RBI balance sheet in terms of reserve money. The RBI been buffering and building the reserves to keep an appropriate quantum on RBI balance sheet. Given this, it may opt for OMO sales of Government securities. OMO sales are not just to suck out liquidity but in a broader context also to maintain the RBI balance sheet at the desired level. Because if the RBI balance sheet, or reserve money, were to go significantly high, it risks inflation particularly in the event of economic activity getting a leg-up."

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