Street expects status quo on rates for FY16

After the Reserve Bank of India (RBI)’s surprise rate cut of 50 basis points (bps) on Tuesday, the next rate cut may be a long wait and Tuesday’s reduction in rate was probably the last cut in the current financial year. Though the central bank Governor Raghuram Rajan said that RBI’s stance will continue to be accommodative, experts believe the central bank has front-loaded rate cuts for this financial year.

In the fourth bi-monthly monetary policy review, RBI reduced the repo rate (the rate at which banks borrow from the central bank) by 50 bps to 6.75 per cent, and with this cut in the current calendar year, RBI has reduced the repo rate by 125 bps.

“I am not expecting another rate cut in this financial year. The next rate cut could happen in April. Should inflation outlook evolve in line with RBI’s trajectory, by April it could create space for a 25-bp rate cut,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.



Consumer Price Index (CPI)-based inflation declined to a nine-month low of 3.66 per cent in August from 3.69 per cent in July. In the monetary policy statement, Rajan said inflation is likely to go up from September for a few months as favourable base effects reverse. Rajan added the January 2016 target of six per cent inflation is likely to be achieved.

“Given the governor’s guidance and the fact that he views the more aggressive 50 bps slash as a front-loading of policy easing, it appears that Tuesday’s cut could be the last for the current financial year. The fact that the one-year treasury bill rate is currently hovering around 7.5 per cent at present and RBI forecasts retail inflation at 5.8 per cent in January 2016 leaving the new preferred measure of the domestic real interest rate at 1.70 per cent — close to the lower bound of the 1.50-2.00 per cent real interest rate range the RBI is comfortable with — perhaps underscores this view best,” said Abheek Barua, chief economist, HDFC Bank.

Experts believe, going forward, RBI will continue to be vigilant for signs that monetary policy adjustments are needed to keep the economy on the target disinflationary path. In fact, few economists expect a prolonged pause, which may extend even beyond the end of this financial year.

“Having delivered a cumulative 125 bps of rate cuts already, we now expect the RBI to stand pat as we expect the underlying inflation trend to stabilise at around 5.0-5.5 per cent with no further sustained disinflation, a gradual growth recovery is already underway and inflation expectations are still high and backward-looking. As such, we expect the RBI to remain on a prolonged hold through end-2016,” said Sonal Varma, India economist of Nomura.