Rate cuts at least 3 mths away as not much room to ease: HSBC

Says the big question that poses is if external stability concerns will recede anytime soon

Rate cuts by the RBI are at least three months away since there is not much room for the central bank to ease them now, an HSBC report says.

HSBC said the question is if external stability concerns will recede anytime soon and sufficiently to allow the RBI to scale back the liquidity tightening measures and resume monetary policy easing.

"We do expect this outcome to eventually materialise, but in our view it is not likely to happen until we approach or even head into the October-December quarter," HSBC Chief Economist for India & ASEAN Leif Lybecker Eskesen said.

"Rate cuts are, therefore, at least three months away," Eskesen added.

Meanwhile, the concerns related to Fed tapering could continue to weigh on emerging market capital flows for the remainder of the year, which in turn would make it difficult for the RBI to roll back the liquidity measures.

"While we expect that the RBI will eventually be able to roll back its liquidity tightening measures as the exchange rate stabilises, it will likely not happen as quickly as the RBI hopes," Eskesen said.

This would have implications for growth and the scope as well as timing of further monetary policy easing, he added.

"The longer these measures have to be kept in place, the larger the pass-through to lending rates and, therefore, the bigger the impact on growth, which would make the policy trade-off more difficult," the HSBC report said.

Lowering the GDP growth projection for the current fiscal to 5.5% from 5.7%, the central bank today said the external sector is the "biggest threat" to economic stability.

It also said that the recent liquidity tightening measures, taken to support the rupee, will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling it to revert to the policy of supporting growth with continuing vigil on inflation.