High real rates may push RBI to shift toward easier policy to boost growth

A sharp decline in India’s consumer prices is pushing real rates of interest to the highest in Asia, boosting expectations that the new central bank governor will shift gears to an easier monetary policy setting to support economic growth.

Economists see high real rates -- or inflation adjusted -- as a threat to investment in an economy gripped by uncertainty before a general election next year and a crisis in the shadow banking sector that’s hurting domestic consumption.

“Number of factors are currently impinging on investment: weak external demand, high real interest rates, low capacity utilization and leveraged corporate balance sheets," economists at Nomura Inc. wrote in a report this week.

Unlike his predecessor Urjit Patel -- a known policy hawk who was wedded to the inflation mandate -- Governor Shaktikanta Das in his first press conference on Wednesday stressed that growth is also part of the Reserve Bank of India’s focus. His comments coincided with a drop in the inflation rate to a 17-month low, adding to the optimism in the bonds market.

Already, the one-year onshore swap rates are factoring a 50 per cent chance of a interest rate cut around April or June, or 100 per cent chance of a 25 basis-point cut in August, according to ICICI Securities Primary Dealership Ltd. That’s a turnaround from a view in October for a hike of 100 basis points over the next 12 months.