Money & Banking

Economists expect RBI to cut repo rate by 25 bps

NS Vageesh Mumbai | Updated on January 12, 2018

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The RBI would like to endow itself with greater ammunition in terms of creating more room for manoeuvre before both inflation and exchange rate come under pressure: Biswa Swarup Misra, Chief Economist, Bank of Baroda

Economists think that the RBI will deliver a 25 basis points cut in repo rate in its sixth bimonthly policy review tomorrow . The repo rate is currently at 6.25 per cent

Biswa Swarup Misra, Chief Economist, Bank of Baroda, said the macro configuration is just right for a 25 bps cut in the policy rates as risks to stability have temporarily moderated. The reduction in policy rate should be seen as a strategy to achieve the growth-inflation rhythm over the medium term, he said.

Specifically, the RBI would like to endow itself with greater ammunition in terms of creating more room for manoeuvre before both inflation and exchange rate come under pressure, he said.

Misra said that the window created by an appreciating rupee in a scenario of narrowing of yield spread on US treasury and Indian G-Secs will be used by the RBI to lower policy rates so as to create greater room for manoeuvrability.

The expected hike in interest rates by the US Fed and the rising oil prices are expected to keep the rupee under pressure in the next few months.

He also expects this to be the last cut in the current rate-easing cycle which began in January 2015 when the repo rate was at 8 per cent.

Demonetisation shock

Indranil Sen Gupta, Chief Economist, Bank of America Merrill Lynch (BoAML), said in his report that he expects the RBI to cut rates by 25 bps on Wednesday on demonetisation shock, benign CPI, fiscal deficit cut and rupee stability. Pranjul Bhandari, Chief Economist, HSBC India, expects the RBI to hold on to its “accommodative stance” and deliver a 25 bps repo rate cut on the assumption that until investment recovers, the central bank will be more flexible with inflation targets.

While it’s a close call, Pranjul said that the expectations of repo rate cut was on the back of low inflation and a negative output gap.

A different take

Madan Sabnavis, Chief Economist, Care Ratings, however differed from other economists and expected a status quo in tomorrow’s policy.

While conceding that CPI inflation is down, and the government’s fiscal deficit was at prudent levels and that Federal Reserve may delay further interest rate hikes, he argued that inflation potential is possible with crude oil prices increasing. Besides, with the Budget sticking to the subsidy level, there is reason to believe that higher prices will be passed on.

Further, growth in credit is tardy and unlikely to pick up. Hence a rate hike can be considered in the next policy when there is clarity on inflation without affecting the growth process, he said in his report.

Also, banks have already lowered the lending rates due to market conditions, and this weapon (of a rate cut) can be reserved for use later, he said.

Published on February 07, 2017

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