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RBI: Downward revision to FY16 GDP estimates likely

Despite Reserve Bank of India's cautious view on inflation, market builds in 75 bps of rate cut

Malini Bhupta  |  Mumbai 

Raghuram Rajan

The Reserve Bank of India (RBI) has found a way to deal with the market's steady clamour for rate cuts. In its bi-monthly monetary policy statement, it has surprised economists with higher-than-expected estimates on retail inflation by March 2016. The central bank expects consumer price index (CPI) to accelerate to 5.8 per cent by the end of the year, after dipping to four per cent in August.

While consensus estimates on inflation are closer to 5.5 per cent, RBI is building in a higher inflation estimate to cut down the clamour for a rate cut in the near term. Soumya Kanti Ghosh, chief economic adviser, State Bank of India, believes the CPI estimate of 5.8 per cent is on the higher side, and this might allow RBI to continue on rate-easing cycle. Others say RBI has done this to rule the possibility of a rate cut in the near term.

Despite this, the market continues to build in further cuts. Nirmal Jain, chairman, IIFL Group, believes the evolving macroeconomic situation is suggestive of lower credit costs, which would spur corporate earnings. Jain expects the repo rate to be cut by 75 basis points (bps) over the year.

RBI’s assessment is a lot sharper on growth. There are murmurings on GDP downgrades, as growth is unlikely to accelerate to eight per cent even under the new GDP series. RBI said though the Central Statistics Office projects a robust pick-up, downward revision in growth is likely once full details of real activity in the March quarter are available. RBI projects GDP growth in FY16 at 7.8 per cent, 30 bps higher than FY15. However, this comes with a downward bias. Sonal Varma of Nomura says RBI sounded cautiously optimistic on growth.

The central bank has also said it will continue with its accommodative stance but further rate cuts will depend on transmission of policy actions. As that has not happened despite a 50-bp rate cut, RBI has tried to bring about a structural change by allowing retail investment in government securities.

By doing so, RBI is attempting to move to a situation where banks will be forced to move to a market-determined rate for deposits, too. With RBI allowing retail to access gilts at market rates, banks are expected to move to market-determined rates on the deposit side. But SBI’s Soumya Kanti Ghosh believes the move will make it challenging for banks to mobilise low-cost deposits making it difficult to cut lending rates.

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First Published: Tue, April 07 2015. 21:36 IST
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