BS Poll: Majority see rate cut by RBI

11 of 17 economists say 25 bps reduction possible on Feb 8

The Reserve Bank of India’s (RBI) sixth bi-monthly monetary policy could be a close call, as the case for a rate cut or pause are equally strong. 

Indeed, most of the 17 economists polled by Business Standard were hesitant to give a clear call on the possible policy outcome. While six economists expected RBI to pause on Wednesday, 11 said the chances of RBI cutting rates by 25 basis points (bps) were a bit on the higher side. One basis point is equal to one one-hundredth of one percentage point (0.01 per cent). 

In the December 7 policy last year, the six-member monetary policy committee decided to keep the policy rates unchanged. Most economists then had expected the central bank to cut rates instead, considering possible growth slowdown due to demonetisation. Demonetisation still remains a key factor, but some say a clear picture of the impact of the move would be apparent only in April, when RBI meets again for a policy review. The policy repo rate now stands at 6.25 per cent. 

State Bank of India Group Economist Soumya Kanti Ghosh sees a pause this time, but said it is a tough call nonetheless. “In any case, we are at the end of the rate cycle. An argument can be built, if the cut comes in February or April,” Ghosh said. 

But the window for a cut is getting narrower, and, therefore, a rate-cut in February could be appropriate, said Upasna Bhardwaj, economist at Kotak Mahindra Bank. 

In support of rate cut, economists point towards steep fall in inflation in the recent months and the fiscal discipline shown by the government as two important domestic factors. 

Finance Minister Arun Jaitley projected a fiscal deficit target of 3.2 per cent of the gross domestic product for 2017-18, surprising the market. In December, Consumer Price Index-based inflation was at 3.41 per cent, which is a significantly lower than RBI’s March 2017 target of containing inflation at five per cent. This gives wiggle room for RBI to cut rates, argued economists. Besides, due to demonetisation, banks have aggressively cut their rates and thereby transmitting the policy cuts, and a rate cut now may also get effectively transmitted, argued those in favour of a rate cut.

“Apart from inflation coming down, the global situation is considerably calmer than what was expected. RBI, in December, had probably wanted to watch out for the financial volatility after Donald Trump’s elevation as US President. That fear has largely subsided. If a rate cut has to be done, this could be the time for it,” said Indranil Pan, chief economist at IDFC Bank. 

Shubhada Rao, chief economist, YES Bank, said, “We expect a 25-bp rate cut due to two reasons. One, inflation is going to remain comfortable. Second, fiscal prudence was adhered to by the Budget. Thereafter, we expect another 25-bp cut till April 2017.”

Tirthankar Patnaik, India strategist, Mizuho Bank, said he expected a cut, “primarily because the inflation metrics that RBI had set out in the previous policy have largely been in line and there is a high probability that inflation might actually undershoot those targets.” Patnaik expects rate cuts both in February and in April. 

Barclays’ Siddhartha Sanyal said, “We expect RBI to cut policy rates cumulatively by 50 bp by mid-2017. The February policy remains a close call; however, our bias is to expect a 25-bp rate cut.”   

                     

“I would also believe that any further easing by the central bank will be front-ended. We believe there will be one more rate cut of 25-bp in April, post which there could be a pause from RBI,” Patnaik said. Patnaik’s take for two rate cuts is not supported by everyone, who expects a cut this time around.

For example, rating agency Icra’s senior economist Aditi Nayar said she expected a 25-bp rate cut now, “followed by an extended pause.” 

Saugata Bhattacharya, chief economist, Axis Bank, sees no compelling reason for a rate cut now, as “rates are already low and global uncertainty still too much to ignore.” 

CARE Ratings’ Chief Economist Madan Sabnavis and Emkay Global’s head of research Dhananjay Sinha both expect a pause. 

Sabnavis says a hawkish stance could be expected in RBI’s policy tone, considering “rising crude oil prices.”

TO CUT OR NOT TO CUT?
The great divide on rate-cut easing
Organisation	Expectation
Axis Bank	Pause
CARE Ratings	Pause
Citibank	Pause
Emkay Global	Pause
India Ratings	Pause
State Bank of India	Pause
Barclays	25 bps cut
Deutsche Bank	25 bps cut
Icra	25 bps cut
IDFC Bank	25 bps cut
Kotak Mahindra Bank	25 bps cut
Mizuho Bank	25 bps cut
Motilal Oswal Financial Services	25 bps cut
Nomura	25 bps cut
Standard Chartered	25 bps cut
Union Bank of India	25 bps cut
YES Bank	25 bps cut
Bps: Basis point
Source: BS Reporters

(With inputs from Sheetal Agarwal, Ram Prasad Sahu and Krishna Kant in Mumbai)