Economists see RBI stance softening further

Economists expect a further monetary easing by the Reserve Bank of India (RBI) in the coming weeks as inflation falls and credit demand moderates in the country. But they are not too bullish on the impact of the RBI-government stimulus on GDP growth.

While Citi India and HDFC Bank did not talk of the extent of further rate cuts, Goldman Sachs said it expected a further 150-basis point reduction in the repo rate and the reverse repo rate to fall by another 100 basis points to bring the corridor to 4-5 per cent.

“With inflation likely to decline to low the single-digit level (the recent fuel price cut will reduce inflation by around 60 basis points), we expect the RBI to continue to ease its policy rates in the coming months,” Citi India Economist Rohini Malkani said in a report.

 

In their reports, Citi and HDFC Bank said it may take some time for banks to pass on the impact of the cut in repo and reverse repo rates to borrowers. Citi added that the cuts will help in flow of credit to the real economy.

In addition, economists at three agencies said the duty cuts will help boost demand. In a report, HDFC Bank said a tax rate cut has a similar impact as additional spending, but works across the board rather than having a focused impact. It also said the impact is faster and the problems with absorption and implementation are avoided.

While the government-RBI joint stimulus may help to an extent, economists said it may not boost economic activity significantly.

Citi India said it will maintain its GDP estimate for 2008-09 at 6.8 per cent and saw it falling to 5.5 per cent next year. Similarly, Goldman Sachs expects GDP to grow 6.7 per cent during the current financial year, followed by an increase of 5.8 per cent in 2009-10.

While Goldman Sachs maintained its fiscal deficit target at 8.4 per cent of GDP, HDFC Bank projected that it will expand from 2.5 per cent of GDP in the budget estimates for the year to 5.1 per cent.