MUMBAI: The Reserve Bank of India is likely to cut the policy rate by a quarter percentage point, with the government adhering to fiscal prudence amid growth optimism and easing inflation, according to an ET poll of 18 market participants. RBI is scheduled to announce the monetary policy on February 8, a week after the Budget was unveiled.
“A conservative fiscal policy, easing inflation trajectory and short-term risks to growth keep the door open for further easing,” said Radhika Rao, a Singapore-based economist at DBS Bank. “The government plans to adhere to fiscal discipline while also making room for inclusive growth policies.”
Finance minister Arun Jaitley’s pledge to bring the fiscal deficit back on track despite some deviation in the next fiscal year has encouraged expectations of further moderation in the policy. Added to that is the government’s plan to step up spending on infrastructure. “Budget’s underlying philosophy on fiscal prudence too has underscored a strong case for RBI rate cut,” said Shubhada Rao, chief economist, Yes Bank. “Together with easing monetary policy and fiscal expenditures towards capex, this should push up the country’s growth.”
The key concerns weighing on the six RBI monetary policy committee members in seeking to push growth won’t be inflation but overseas factors, analysts said. These include US policy changes, rate increases by the US Federal Reserve and China’s growth outlook “RBI’s biggest challenge this year will be to strike a right balance between supporting growth and increased external uncertainties,” said Anubhuti Sahay, chief India economist at Standard Chartered. “Retail inflation is unlikely to pose any challenge with easing food prices and contained core inflation (excluding gold)… Increased infrastructure and rural allocation are key positives from the Budget.”
The central bank left rates unchanged at the last policy announcement on December 7, despite widespread expectations of a rate cut. Wednesday’s policy statement will also be keenly parsed for anything RBI has to say about demonetisation, which was announced on November 8. With the window for deposits of old notes at banks having closed on December 30, the central bank will have a better understanding of how much cash has come into the system.
Domestic debt securities could well lose their sheen in the event of the Federal Reserve raising rates, thus narrowing the differential with Indian bonds, adding to RBI’s policy complications.
During the fiscal, the benchmark bond yield has dipped by 110 basis points, pushing prices up. One basis point is one hundredth of a percentage point. Retail inflation, a key trigger for rate actions, has been in line with RBI’s 5% target for March end. The Consumer Price Index dropped to 3.4% in December from 6% in July 2016.
Banks, meanwhile, have slashed lending rates across the board, emboldened to pass on RBI’s previous rate cuts as deposits of demonetised notes have left the system flush with funds. Overall system liquidity is running at more than Rs.5 lakh crore, according to India Ratings, against a deficit nearly a year ago. But with remonetisation picking up, that’s expected to recede ahead of the fiscal year-end as withdrawal limits are eased, shoring up market rates, experts said.
“With commercial banks already having cut their lending rates by about 80-90 bps (basis points) in one clip earlier this year, it is unlikely that they will reduce the rates any further without the policy rate being lowered further,” Kaushik Das, Mumbai-based economist at Deutsche Bank, said in a note.
In the current financial year, the central bank has collectively slashed the repo rate, at which banks borrow short-term funds from RBI, by half a percentage point to 6.25%.
“There has already been significant lending rate transmission, which is expected to persist in the near future,” said Saugata Bhattacharya, chief economist at Axis Bank.
Credits ET Realty