In conversation with Jinsy Mathew, Upasna Bhardwaj, economist at ING Vysya Bank shares her view of today’s Policy. Even as she is optimistic about a rate cut in near future, an unfavourable base effect may weigh the inflation data in 2015
Your initial reaction to the Policy and what according to you were the highlights?
The Policy was in line with expectations and the markets were expecting a dovish stand from the Governor, which he did deliver. The announcement for the day was the narrative that the RBI in all likelihood will change its stand on the Policy early next year which is definitely a sentiment booster.
We were looking for an April 2015 rate cut and I continue to believe in that stand as we will have a constructive view of the macro scene in terms of various data, oil price trajectory and also the Budget will be over. Till February I do not see any action, post that there can be a case of a mixed policy act.
So it’s a March rate cut if at all?
I would say April but since Governor has mentioned a mid policy action it can be some time after the Budget.
Can we expect a 50 bps cut in April then?
I would say the Governor would start with a 25 bps cut because as we go ahead into the next year we have an unfavourable base effect in waiting coupled with the uncertainties of monsoon, growth and oil prices. This will force the policy makers to be not so aggressive to start with.
How do you see the inflation trajectory panning out in the near term?
On the inflation front, I think the upcoming data will be sub 4.5% but post that we will be tending towards 6%. My estimates are almost in line with the current RBI outlook. For calendar year 2015, we should be hovering around 6%.
Do you see crude oil price as a party spoiler for a rate cut if the crude prices were to reverse from current levels?
Yes, but the extent of reversal will be watched. A $10 rise from current levels will not be a spoiler. But if the crude makes a dash towards $100 then we have a problem as it would increase the upside for inflation risks.
Do you think a rate cut will be enough to boost growth?
A combination of prudent monetary and fiscal policy contributes to growth and either of the factors alone is not of much help. So far, RBI has been firm and has managed to anchor inflation while the government has taken several measures which I think is in the correct direction. The positive effects will materialize with a lag and hence in the subsequent quarters the positive impact will be seen.
If RBI goes ahead with a rate cut post Budget, do you see banks following suit?
The monetary policy transmission always comes with a lag, so the banks may not cut rates right away. It will take a couple of months before banks begin to lower lending rates