Demand for policy rate cut may be considerable, but given the central bank’s inflation target, rate cut space is scant, and the Reserve Bank is likely to cut only 25 bps in the upcoming monetary policy, a Deutsche Bank report says.
According to the global financial services major, with RBI sticking to its goal of maintaining 1.5-2 per cent average real interest rate, which along with an average CPI inflation forecast of 5 per cent for 2016-17 leaves little room for bringing the repo rate below 6.50 per cent.
“If RBI somehow cuts rates by 50 bps on April 5, which is not our base case scenario, probably the central bank will also signal an extended pause, and risks are that market will factor in that the rate cut cycle is over,” Deutsche Bank said in a research note.
Meanwhile, RBI Governor Raghuram Rajan on February 2 left the key interest rate unchanged, citing inflation risks amid growth concerns.
The report further noted that “while we think RBI will cut only 25 bps in the upcoming monetary policy, we however do not completely rule out the possibility of further rate cuts in the second half of this year”.
Moreover, if growth may continue to surprise on the downside and inflation stays at the 5 per cent level, the central bank may entertain a slightly lower real interest rate, which in turn “might open up room for a further 25-50 bps rate cut”, it explained.
On CRR, the report noted that “in our view, even if RBI cuts CRR by 50 bps this time, this will be just a one-off, as the CRR rate is already at a historical low, and we don’t think RBI will want to drive the rate further lower”.
The declining inflation and a negative industrial outlook have strengthened the case for RBI to cut interest rate in its first bi-monthly monetary policy for 2016-17 on April 5.
Meanwhile, Rajan on March 12 had said the government sticking to fiscal consolidation road map of reducing deficit to 3.5 per cent of GDP in 2016-17 was comforting. On how that would feed into monetary policy, he had said “wait and see”.