Further rate cuts will depend on inflation remaining in single digits: Sonal Varma

Q&A with India economist, Nomura Financial Advisory & Services

The Reserve Bank of India today cut the repo rate by 25 bps amid signs of slowing inflation and citing government's commitment to contain the fiscal deficit. Sonal Varma, India economist, Nomura Financial Advisory & Services tells Tulemino Antao that further rate cuts will depend on inflation staying in single digits. Edited excerpts:

What is your take on the rate cut by the RBI much ahead of the policy meet in early February? When do you forsee the next rate cut if any during the current fiscal?

The RBI statement suggests that further rate cuts are dependant on inflation remaining in single digits. 

The RBI has already lowered the rate much ahead of its policy meet scheduled for Feb 3. We don't expect any rate cut in February and further rate could possibly come early next fiscal around April.

Do you think this rate cut is enough to revive growth?

Obviously, it is a move to boost sentiment and ease balance sheet pressures of companies. Further, the government will continue on its path of economic reforms and kickstart the stalled projects.

How much will the fall in crude prices impact inflation? Will it lead to more rate cuts?

Inflation remains lower at 5%. Lower global crude oil prices would decrease cost pressures for refiners while lower retail fuel prices would boost purchasing power of consumers and also help contain CPI inflation.

What local or global factors could prompt the RBI to halt further rate cuts?

Locally, pick-up in inflation and deterioriation of fiscal situation could be the factors. Globally, capital outflows could put pressure on the currency while rebound in oil and commodity prices would also act as a deterrent. 

What trend will the bonds prices follow with the interest rate cycle softening?

In the short term, we see bond yields around 7.5% by the middle of this year.