1. RBI credit policy 2016: Governor Urjit Patel could cut repo rate by 25-50 bps on Wednesday post demonetisation

RBI credit policy 2016: Governor Urjit Patel could cut repo rate by 25-50 bps on Wednesday post demonetisation

Fuelled by moderating food prices and to limit the downside from demonetization, the Reserve Bank of India is likely to cut rates by 25-50 bps in the fifth bi-monthly monetary policy statement for 2016-17 due on Wednesday.

Updated: December 6, 2016 6:13 PM
In its last policy review in October, the RBI had cut the short-term lending (repo) rate by 0.25 per cent to 6.25 per cent, and has reduced the policy rate by 1.75 per cent since January 2015. (Reuters) In its last policy review in October, the RBI had cut the short-term lending (repo) rate by 0.25 per cent to 6.25 per cent, and has reduced the policy rate by 1.75 per cent since January 2015. (Reuters)

By Sanjeev Sinha

Fuelled by moderating food prices and to limit the downside from demonetization, the Reserve Bank of India (RBI) is likely to cut rates by 25-50 bps in the fifth bi-monthly monetary policy statement for 2016-17 due on Wednesday. This will be the second monetary policy announcement after Urjit Patel took over as the RBI governor on September 4 this year.

In its last policy review in October, the RBI had cut the short-term lending (repo) rate by 0.25 per cent to 6.25 per cent, and has reduced the policy rate by 1.75 per cent since January 2015.

While some industry experts and research houses see the possibility of a 0.25 per cent rate cut, others are expecting the RBI to cut rates by 50 bps in view of softening of inflation and spike in bank deposits following the demonetization drive.

Edelweiss Securities Limited, for instance, foresees a 25-50 bps cut in the repo rate in the forthcoming monetary policy review on December 07. It, however, says that it leans towards a 50 bps cut for the simple reason that even before demonetisation, “we were seeing the rising possibility of a 50 bps cut spread over the next 2-3 policy reviews, given that the RBI had lowered its assessment of neutral real rate and inflation was expected to be lower than RBI’s indicative trajectory.”

However, post demonetization, near-term risks to both inflation and growth are tilted towards the downside. Thus, it makes sense to front-load the monetary easing to limit the downside from demonetisation. Yet, “we are mindful of the changing global dynamics with the USD rallying and US10Y bond yields hardening amid expectations of fiscal stimulus in the US. Such a set-up does curtail independence of EM central banks, including India. This could well be the factor which might constrain RBI’s hand.
To that extent, a 25 bps or 50 bps cut becomes a close call. We, for one, tilt in favour of 50 bps,” says Edelweiss Securities in a research report.

HSBC, on the other hand, expects the RBI to cut the policy repo rate by 25 bps and adds a further 25 bps rate cut for February, due to the effect of demonetization, which will take the repo rate to 5.75%.

“We add an additional 25bps rate cut for the February meeting. The risk to our view is that much of the growth drag turns out to be temporary, not requiring an additional rate cut. But until we see some data that suggests this, we hold on to two rate cuts. While things are still fluid, we will be looking to get RBI’s views on a host of issues – how much and how permanent will the growth drag be? How much does Fed action matter for India? Will GST add to disruptions? Is there possibility of any fiscal bounty?” says an HSBC Research report.

What might restrict the RBI’s hand, however, is the evolving global situation. Donald Trump’s victory in US Presidential elections has fuelled expectations of fiscal expansion. Historical evidence suggests that the combination of easier fiscal policy and tighter monetary stance in the US would drive USD higher. Since Trump’s victory, USD has appreciated 5%, US bond yields have risen by 60 bps and INR has fallen by 2.5%. These developments would certainly weigh on RBI’s stance and may prevent it from getting aggressive on the rate cuts.

Overall, “the RBI would have to play a balancing act. Domestic considerations argue a 50bps cut, but developments on external front warrant a more measured policy action,” observes Edelweiss Securities.

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  1. George Cv
    Dec 6, 2016 at 1:29 pm
    Who is Urjit Patel to cut ? Say modi will cut !
    Reply

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