RBI may wait till December for rate cut, says Ind-Ra

| Updated on: Jan 16, 2018

Central bank to have better clarity on retail inflation; US electoral results will be out by then

The scope for Reserve Bank of India’s action on the rate cut front appears skewed towards the December 2016 policy review than October 2016, according to India Ratings (Ind-Ra).

The credit rating agency reasoned that the RBI would have better clarity on the retail inflation trajectory for the last quarter of the fiscal as well as the US electoral outcomes and the Federal Reserve rate trajectory by December 2016.

The RBI, under newly-appointed Governor Urjit Patel, is scheduled to announce its Fourth Bi-monthly Policy review on October 4.

In the last Bi-monthly Policy review in August, the RBI had kept the policy repo rate (the interest rate at which the central bank provides short-term liquidity to banks) under the liquidity adjustment facility unchanged at 6.5 per cent. The RBI then reasoned that the risks to the inflation target of 5 per cent for March 2017 continued to be on the upside.

The central bank had last cut the repo rate to 6.50 per cent from 6.75 per cent in April.

As a consequence of dovish outcome from the US Fed and Bank of Japan (BoJ) policy, the domestic bond market has already started focusing on the RBI’s policy on October 4, said Ind-Ra economists Bansi Madhavani and Soumyajit Niyogi in their report.

Moreover, with the Monetary Policy Committee (MPC) in place, the market can hope for action on the rate front.

“As two critical hurdles (US Fed and BoJ policy) have now passed, momentum in the domestic rate market will be focussed on the Reserve Bank of India’s policy…The rupee will stay firm and could trade at 66.45/dollar-67/dollar (66.65/dollar on 23 September) throughout the week, while the old 10-year Government Security yield trading range could be at 6.92 per cent-6.98 per cent (6.97 per cent on 23 September),” said the report.

BoJ policy potential

The agency believes BoJ policy can actually propel carry-trade in the near future. The BoJ has announced a long-term 10-year financing window at a fixed rate, expanding from the existing facility of a one-year window. As a consequence of eliminating refinancing and interest rate risks, the new facility could encourage Japanese institutions to run leverage investments in other economies offering higher rates.

“Since India is a preferred destination for Japanese institutions and corporates, high interest rate differential could augment portfolio flows from Japan in the future,” said Ind-Ra.

Published on September 26, 2016
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