What gives RBI room to cut policy rates again in 2017? CLSA’s Chris Wood explains

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Published: August 4, 2017 12:13:51 PM

CLSA's managing director Chris Wood believes the Reserve Bank of India will cut key policy rates one more time before the end of this calendar year 2017, following up on its latest 25 basis points reduction in repo rate announced earlier this week.

Chris Wood says that India’s high real interest rate, which was at about 4.7%, was among one of the reasons behind the strength in the value of the rupee. (Image: Reuters)

A top equity strategist believes the Reserve Bank of India will cut key policy rates one more time before the end of this calendar year 2017, following up on its latest 25 basis points reduction in repo rate announced earlier this week. Chris Wood, managing director and equity strategist at the research and brokerage firm CLSA wrote in his weekly note ‘Greed & Fear’ that there is enough room for RBI to cut interest rates one more time this year. Chris Wood wrote that the RBI will cut repo rate once more in 2017 given the high real interest rates in India. The renowned equity expert further wrote that India’s high real interest rate, which was at about 4.7%, was among one of the reasons behind the strength in the value of the rupee.

The Reserve Bank of India cut repo rate on Wednesday by 25 basis points to 6% in its latest credit and monetary policy review, reducing the key policy rates for the first time in this fiscal year, as was expected given the constantly falling inflation. The revised repo rate at 6% is the lowest in six-and-a-half years since November 2010. The central bank also kept the policy stance ‘neutral’ with an eye on inflation, which it said will be watched for a rise later this year.

Accordingly, the revised reverse repo rate and the marginal standing facility rate will now stand at 5.75% and 6.25%, it said in a statement. Further, RBI kept the SLR (Statutory Liquidity Ratio) unchanged at 20%. Earlier in June, in its last credit and monetary policy review, RBI had kept the repo rate unchanged at 6.25% in line with the expectations, choosing to wait to see the behaviour of inflation and avoiding a ‘premature’ action.

“The MPC observed that while inflation has fallen to a historic low, a conclusive segregation of transitory and structural factors driving the disinflation is still elusive… The MPC will continue monitoring movements in inflation to ascertain if recent soft readings are transient or if a more durable disinflation is underway,” RBI said in its bi-monthly monetary and credit policy review this week.

A slump in food prices sent India’s June CPI inflation (consumer inflation) to an over five-year low of 1.54 — well below the RBI’s 4% target and its projection of 2%-3.5% for April-September. Falling inflation had sparked pressure from the government to cut rates in the policy on Wednesday and signal further easing later this year. RBI had raised concerns that inflation could accelerate due to a seasonal rebound in food prices and factors such as planned pay hikes for government employees.

Meanwhile, the government is rooting for a rate cut to boost falling GDP growth rate. India’s economic growth slowed down to a 3-year low of 7.1% in 2016-17 due to the effect of demonetisation and lost the tag of world’s fastest growing major economy tag to China. The data released by the Central Statistics Office (CSO) earlier this year revealed that the GDP (gross domestic product) growth for the January-March quarter slowed to 6.1% while GDP growth for the full financial year 2016-17 stood at a three-year low of 7.1% due to the impact of demonetisation

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