The next rate cut will perhaps be in the first week of March: Taimur Baig

Q&A with Chief Economist Asia, Deutsche Bank

Taimur Baig, Chief Economist Asia, Deutsche Bank in an interview with Tulemino Antao shares his views after the RBI maintained status quo on key rates at its policy review today. Edited excerpts:

What is your take on the Reserve Bank of India's move to keep key rates unchanged at its policy meet today?

Trying to strike a balanced tone, the Reserve Bank of India left key policy rates unchanged at today’s monetary policy review, while it cut the statutory lending ratio (SLR) by 50bps to 21.5% of the deposit base. This will free up about Rs 420 billion of liquidity, for banks to increase their lending to productive sectors of the economy.

When do you see the next rate coming in?

We had thought that although not much had changed since the mid-January off-cycle rate cut, the central bank would cut again in order to realign monetary policy action with scheduled meetings. But given today’s statement, it is clear that the RBI will remain flexible in terms of taking off-cycle actions. Clearly with the budget coming in a few weeks from now, the next rate cut now seems likely to be off-cycle, perhaps in the first week of March.

What trends do you see for consumer price inflation with food and vegetable prices remaining high?

Looking ahead, we think that given global developments, inflation pressure will remain muted for the course of this year. It is clear that CPI inflation will remain subdued (below 6%) in 1Q of 2015 and WPI inflation will probably turn negative due to the recent petrol and diesel price cuts. Pressure on food prices seem to have also eased considerably, which has been the main driver of inflation in recent years and our daily food price tracker continue to show disinflation in various food items, particularly vegetables. Moreover, inflation expectations have moderated considerably and the government has re-affirmed its commitment to meet the FY15 fiscal deficit target of 4.1% of GDP. Conditions for further policy easing to continue are firmly in place, in our view.

What are the key macro data the central bank look into ahead of the Budget or otherwise?

Ahead of the Budget the central bank would have more information about the rebased-CPI (the new series of CPI will be released on 12th February, which will reflect data for the month of January 2015) and new GDP figures (to be released on 9th February). Further action would be toward more easing, as soon as a responsible budget and evidence of continued disinflation materialize.

What quantum of rate cuts do you forsee for calendar year 2015?

The RBI will not only cut in early-March, in our view, but more cuts await in the first half of this year. We therefore see 75bps more rate cuts by June. A cumulative 100bps rate cut in 2015 is feasible in our view, as we expect CPI inflation to average 5.5% in this and next year, which should help maintain a positive real interest rate of 1.5% (annual average), critical for incentivizing financial savings in the economy.