RBI will consider slashing repo rate by 0.25 per cent in its upcoming policy meet, irrespective of a rate hike by US Federal Reserve, Ind-Ra said today.
“Ind-Ra’s base case expectation is a 25bps (0.25 per cent) repo rate cut on September 29, 2015. Ind-Ra believes the Reserve Bank of India (RBI) will consider reducing policy rates this month, irrespective of the Fed hike,” the ratings and research firm said in a report.
Given the low inflation and attractive real interest rates in the economy, RBI has an elbow room to cut rates aggressively, it said.
If the Fed hikes federal funds rate by 25 bps and there is ensuing volatility in the currency, RBI may still reduce rates, but the elbow room could be lower to protect the Indian rupee, it said.
“However, if the Fed were to delay the normalisation process, the cushion available could be higher, though RBI may like to retain flexibility for future volatility,” it said.
The slowing global economy and recent volatility in emerging market currencies as well as equity markets could drive the Fed to delay the normalisation process, timing is the only concern, it said.
While the Fed hike debate goes on, markets will probably stay volatile and rupee is expected to maintain a weakening bias in the short term, it said.
“Nonetheless, India’s overall macro fundamentals remain robust supporting a case for a stronger rupee over the medium term,” it said.
The ratings agency said India’s growth is recovering and the external sector is resilient.
“Indian economy continues to improve gradually, driven by low commodity prices and high propensity of consumers to spend…Index of Industrial output growth stood at 4.2 per cent in July,…data points towards the nascent signs of recovery which are likely to gain traction,” it said.
However, a strong external account does not by itself shield the economy from global vulnerabilities.
Further, the agency expects inflation to stay soft in August as commodity prices remain weak and base effect supportive.
“Bond yields are set to soften with Ind-Ra’s expectation of CPI inflation of around 3.5 per cent. Crucially, the outcome of the Fed meeting will mark the inflection point,” it added.