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The Reserve Bank of India (RBI)'s move to deliver yet another inter-meeting rate cut is an interesting one. There is a clear case for rate cuts at the moment in India. Disinflationary trends are real and broad-based and are, in fact, materially stronger than, as some suggest, largely due to softer oil prices.
It is also heartening to see RBI's interpretation of the Budget goes beyond the optics of the headline deficit print and actually emphasises on the quality of fiscal arithmetic and the intent of the government. It is important to note that the larger transfers to states, in line with the Finance Commission's recommendations, will likely improve the consolidated fiscal balance of states, and the reduction in subsidies and the implementation of direct transfers of benefits should considerably increase the efficiency of social spending over a period of time.
Overall, Wednesday's rate action is part of the ongoing cycle of monetary accommodation. I expect another 25-basis point (bp) cut during the second quarter, more likely in June than in April, given Governor Raghuram Rajan's comment that the current RBI action had been a "pre-emptive" one. Separately, RBI reiterated its preference for a real policy rate of 150-200 basis points, which can potentially limit the depth of this rate-cutting cycle. We feel, thus, beyond the next rate cut in June, RBI will likely pause and have a closer reassessment of the medium-term inflation trajectory.
On a different note, the two cuts in 2015 came in inter-meeting moves. While such moves are never ruled out by RBI, it is important to note that multiple inter-meeting moves can potentially infuse a degree of unwarranted surprise and speculation about monetary policy, which should ideally be avoided to the extent possible from a longer term perspective. An inter-meeting move is a perfect response in case of major unanticipated financial market developments, but, is possibly not the best approach when the central bank attempts to address longer term and core macroeconomic issues such as growth and inflation.
Siddhartha Sanyal
Chief India Economist, Barclays
