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Window is scant, RBI to cut rates by 25% on April 5: Deutsche Bank

Declining inflation and a negative industrial outlook have strengthened the case for RBI to cut interest rate

Press Trust of India  |  New Delhi 

Deutsche Bank
Deutsche Bank Picture courtesy: Wikipedia commons

Demand for policy may be considerable, but given the central bank's target, space is scant, and the Reserve Bank is likely to cut only 25 bps in the upcoming monetary policy, a report says.

According to the global financial services major, with sticking to its goal of maintaining 1.5-2% average real interest rate, which along with an average CPI forecast of 5% for 2016-17 leaves little room for bringing the repo rate below 6.50%.

"If 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 cycle is over," said in a research note.

Meanwhile, Governor on February 2 left the key interest rate unchanged, citing risks amid growth concerns.

The report further noted that "while we think 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 stays at the 5%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 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 will want to drive the rate further lower".

The declining and a negative industrial outlook have strengthened the case for 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 to 3.5% of in 2016-17 was comforting. On how that would feed into monetary policy, he had said "wait and see".

First Published: Mon, March 21 2016. 14:23 IST