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Further rate cuts by the RBI is likely to be “slow and halting” and the central bank is likely to go for only 0.5 per cent rate cut for the remainder of 2013 calendar year, says a RBS research report.
The policy repo rate, which was reduced by 0.25 per cent to 7.5 per cent, was in line with expectations but the accompanying statement admitted that headroom for further cuts is “limited’’.
Monetary easing
The statement identified two major hurdles to aggressive monetary easing — the stubbornly high CPI, which could adversely affect inflation expectations, and the high current account deficit.
“As long as these two obstacles do not mitigate, we believe that further rate cuts will be slow and halting,” RBS analyst Sanjay Mathur said.
“We now forecast further rate cuts of only 50 bps for the remainder of the year,” Mathur added.
Current account deficit
According to RBS for an aggressive easing cycle to fall in place, the current account deficit will need to stabilise at 2.5 to 3 per cent of the GDP.
Though the RBI acknowledged the recent reduction in trade deficit, but it views even the reduced level of around $15 billion per month to be on the high side, RBS said.
As long as consumer inflation remains high, real deposit rates for the household sector will remain negative and draw households away from bank deposits into physical assets such as gold and real estate.
The RBI today cut its short-term lending rate by 0.25 per cent to spur growth and revive investment but sounded a note of caution on further easing of rates on account of high food inflation and current account deficit.
The current account deficit (CAD) represents the difference between inflows and outflows of foreign currency. The CAD had touched a record high of 5.4 per cent of GDP in the July-September quarter.
Trade deficit in January widened to $20 billion, the second highest rise ever in a month. The biggest trade gap of $21 billion was recorded in October 2012.
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