Front-loaded rate cut not accommodative: Saurabh Mukherjea

Believes there will be limited rate cuts in FY17, due to probability of fiscal slippage and risks to inflation

Even as the Reserve Bank of India (RBI) lowered the repo rate by 25 bps, we believe that the RBI has only front-loaded its rate cuts as opposed to making its stance more accommodative. We expect the room for rate cuts to be limited owing to three reasons: First, there is a low likelihood of the recent decline in food inflation sustaining, as it was not driven by structural efforts to improve supply; second, it would make a great deal of sense for the RBI to signal to the government that the fiscal math for financial year 2016-17 appears overtly ambitious and the government needs to do more to build credibility; and third, though oil prices have a limited impact on CPI inflation, Brent prices have rallied by about 17 per cent in two months.

We believe there will be limited rate cuts in FY17, owing to the high probability of fiscal slippage and risks to inflation. After the reduction in the repo rate, we expect up to 25 bps cuts in FY17.

The focus of the monetary policy is likely to be on alleviating liquidity pressure through SLR or CRR cuts or other non-conventional tools as the banking system faces liquidity pressure.
Saurabh Mukherjea
CEO, institutional equities, Ambit Capital