RBI rate cut: 25-50 bps reduction in CY17 possible, says Kotak

By: |
Published: December 9, 2016 6:09:56 AM

RBI surprised with a status quo on policy, premised on upside risk to Q4FY17 inflation and limited transient growth drag owing to demonetisation.

The Reserve Bank also said that it "will shortly" issue Rs 500 denomination banknotes in the Mahatma Gandhi (New) Series, without any inset letter, bearing signature of Governor Urjit R Patel. (Reuters)As per RBI’s assessment, the negative impact of demonetisation on growth would be to the tune of ~15 bps and will likely be transitory. (Reuters)

RBI surprised with a status quo on policy, premised on upside risk to Q4FY17 inflation and limited transient growth drag owing to demonetisation. The tone was hawkish and we do not rule out another status quo in February, albeit contingent on the CSO advance estimate of FY2017 GVA.

However, we do see underlying disinflationary forces to continue, implying possibility of 25-50 bps cut in CY2017.
RBI kept the policy rates unchanged at 6.25%, with all MPC members voting in favor of status quo. The policy tone was titled towards a hawkish stance. RBI noted that the disinflationary impact of demonetisation is likely to be low and transitory in nature, and could lower the Q3FY17 inflation by ~10-15 bps.

You May Also Want To Watch:

On the other hand, the upside risk to Q4FY17 inflation target of 5% are emanating from (1) rise in crude oil prices, (2) sticky core inflation, (3) upside risk to food inflation owing to supply disruption and signs of firming of food prices ex-vegetables, and (4) likely financial market turbulence and rupee volatility.

Even as RBI sharply lowered its real GVA forecast for FY2017 by 50 bps to 7.1%, it reckoned that the revision is largely owing to the downside surprise in Q2FY17. As per RBI’s assessment, the negative impact of demonetisation on growth would be to the tune of ~15 bps and will likely be transitory. This further implied that the negative
demand shock to inflation will also be low and transitory in nature.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

FinancialExpress_1x1_Imp_Desktop