RBI may cut rates by 25bps despite Fed, monsoon risks


MUMBAI: Reserve Bank of India (RBI) governor Raghuram Rajan is widely expected to cut interest rates by 25 basis points in the monetary policy review on September 29. The financial markets have already factored in a rate cut, with yield on the benchmark 10-year government bond dropping by five basis points last week.

Central banks across the world have been slashing rates or easing policy as commodity prices crash and global growth slows. Some economists expect that Rajan, too, will lower growth projection for FY16 from 7.6% to 7.4%. Rajan kept the market guessing last week when he said: “For any hints on what we will do in the upcoming policy statement, please read the guidance in our last policy statement.” In his August policy, the governor had said that future cuts would be subject to inflation and playing out of uncertainties on inflation, monsoon and action of the US Federal Reserve.

Last week, although inflation was low, but Rajan attributed it to the base effect, and monsoon has been below normal. The US Fed chose to pause, but it has indicated a rate hike in 2015.

“We continue to expect RBI governor to cut rates by 25 basis points on September 29. The RBI will likely talk hawkishly – citing monsoon and Fed risks – to signal that it will hold through December. We expect a final 25 bps cut in February with inflation meeting the RBI’s under -6% January 2016 target,” said Indranil Sen Gupta, India economist with DSP Merrill Lynch.

According to Sonal Varma of Nomura Research, the RBI will deliver a final 25-bps rate cut at its September 29 policy meeting and to adopt neutral to mildly hawkish forward guidance as it shifts its CPI inflation goalpost to an intermediate target of 5% by Q12017. “We also expect the RBI to lower its near-term growth projection to 7.4% (from 7.6%), citing weak external demand and deficient monsoons, and its January-March 2016 inflation projection to 5.5% on lower oil prices and contained food inflation,” she added.

But there are dissenting voices. According to Madan Sabnavis, chief economist, Care, there is a strong reason to keep rates unchanged considering that the concerns that the RBI had in the August policy linger even today. “In fact, the additional information we have is of the kharif crop being less than last year, which will exert pressure on prices. The favourable base effect which has caused euphoria in the market on inflation, will wear off fast. Add to this a deferment of Fed rate hike, currency volatility and negative FPI – the case strengthens. In such a situation, we do take a contrarian stance on the policy and tilt towards the status quo.”

There are others who feel that the governor might look beyond inflation. “The factors which currently pose challenges to the growth dynamics are high non-performing & restructured loans, increase in corporate leverage, weak corporate sales, poor export demand and uncertainty over the US Fed rate hike,” said Arun Singh, senior economist, Dun & Bradstreet India. Singh further added that “weak demand along with low inflation has provided more room to the RBI to further cut the policy rate in the upcoming meet”.

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