Bankers and economists expect the Reserve Bank of India (RBI) to maintain status quo in its sixth monetary policy on Tuesday even as room for more rate cuts could open once the Union Budget is through on February 29.
In a pre-policy poll done by Business Standard of 10 institutions, all but one expect RBI to keep its policy repo rate unchanged at 6.75 per cent. Bank of America-Merrill Lynch economist Indranil Sen Gupta, though, expected there were compelling reasons for the central bank to execute a 25 basis point (bps) cut on February 2 and pause thereafter.
Sen Gupta cited factors like inflation being within RBI's January 2016 target, weak growth rate prompting RBI to cut, which would in turn help foreign investors to come back to the rate sensitive sectors. Sen Gupta also expected the fiscal deficit to be under control at 3.9 per cent of gross domestic product and that it was imperative for the 10-year bond yields to fall to nudge banks to pass on rate cuts.
However, others do not agree.
"There are too many uncertainties right now and Budget is just a few days away. There is a very high likelihood that that central bank will stay put from cutting rates," said Saugata Bhattacharya, chief economist at Axis Bank.
Bhattacharya sees room for 50 bps cut after the central bank sees the Budget math.
State Bank of India chief economist Soumya Kanti Ghosh expects status quo in the policy this time but sees room for a rate cut of up to 75 bps.
The real rate of return, which is measured by policy rate minus inflation, is currently less than one per cent. The CPI inflation was at 5.61 per cent in December, lower than RBI's own expectation of six per cent by January 2016, but index of industrial production also shrunk to 3.2 per cent in November, raising expectation that RBI, sooner or later, will have to ease its policy rate.
"In the face of a currency volatility like now, there is no need to do any rate change, but Asian countries have started easing and it remains to be seen how long the RBI can hold," said Indranil Pan, chief economist of IDFC Bank.
Pan sees scope for another 25-50 bps rate cut post-Budget.
While Standard Chartered Bank does not entirely rules out a rate cut on February 2, its chief economist Anubhuti Sahay said RBI would want to exercise a pause this time for two reasons: First, the RBI would like to get more comfort on food inflation, which still remained elevated. And second, monetary policy transmission would be far better in April 2016 than in February on the new marginal base rate system implementation from April and on reduced uncertainty for the government securities market about the likely fiscal deficit target in fiscal 2017 and supply pressure.
“We expect the RBI to strike a dovish note and leave room open for rate cuts in future. We expect a 25 bps rate cut in the April policy meeting. More cuts cannot be ruled out if growth headwinds increase,” Sahay said.
“If fiscal consolidation continues rapidly (in the Budget), there will be headroom for future cuts. However the Seventh Pay Commission and One Rank One Pension pose considerable fiscal challenges. If fiscal consolidation is slow, further monetary easing may be limited,” said S P Prabhu, head of fixed income at IDBI Federal Life Insurance.