One more rate-cut likely in near term, say economists

The Reserve Bank of India’s 25-basis-point repo rate cut on Tuesday may not be a flash in the pan.

There may be more to come, say economists and experts who decoded the monetary policy statement and looked for clues about what the future holds for interest rates.

The RBI cut rates by 25 bps to 6.25 per cent, the first in six months.

The monetary policy statement has sent dovish signals, economists said. While there was no indication of any liquidity measures (expected in the backdrop of the FCNR(B) deposits redemption), such as an easing of the cash reserve ratio (CRR), the experts felt that the RBI would provide sufficient liquidity through open market operations.

Rating agency ICRA expects the rate-easing cycle to continue. It thinks that additional open market purchases of government securities of ₹50,000-60,000 crore are likely in Q3 FY17.

ICRA expects banks will cut lending rates although bond yields may not soften further.

Citi India’s economists Samiran Chakraborty and Anurag Jha, said in a report that they believe at least one more rate cut of 25 bps is likely in the near term.

But, anything beyond the expected cut in December would require CPI to sustainably undershoot the expected inflation trajectory. It noted that there were four important ‘dovish’ departures from the earlier policy that lend credence to its belief that there is scope for more easing.

They are: ‘upside risks’ to the 5 per cent CPI by March 2017 date were retained, but risks lower than envisaged earlier; there was no specific timeline for the 4 per cent inflation target; real policy rate guidance lowered to 125 bps from 150-200 bps earlier; andthere was repeated emphasis of the ‘growth objective’ in the policy.

Bank of America-Merrill Lynch’s Indranil Sen Gupta said in a report that he expects a final cut of about 25 bps on February 7.

He doesn’t expect the rates to go below 6 per cent because of the medium-term inflation target.

He expects the RBI to conduct open market operations of about ₹75,000 crore by December and a total of about ₹90,000 crore by March in addition to the OMOs of ₹110,000 crore done so far.

HSBC economist Pranjul Bhandari said in her report that “the assessment on the real neutral rate and clarification on inflation targets make us more confident of our 25-bps rate cut call for the rest of the fiscal year.

“We see CPI inflation average 4.75 per cent over the next 12 months, which opens up the space for a 25-bps rate cut.”

She said that the RBI was a tad cautious on its inflation forecast for early 2017, highlighting upside risks to 5 per cent.

She thinks that once the next two inflation prints (September and October) come in lower than 5 per cent, the RBI will feel comfortable to lower its forecast in the next December policy meeting.

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