RBI may cut 25 bps on Dec 7, another in Q1 of 2017: DBS

The RBI monetary policy committee (MPC) is likely to consider a 25 bps rate cut on Wednesday, followed by another in the first quarter of 2017 amid downside risks to growth following the notes ban and subdued inflation, says a DBS report.

According to the global financial services major, the RBI policy committee is expected to take a 'growth-supportive' stance as the government's recent banknote ban has raised downside risks to growth for at least two quarters, beginning the October-December quarter.

Moreover, the subdued inflation is also expected to keep the door open for an easy policy bias.

"These are likely to prod the MPC to consider a 25 bps rate cut on Wednesday, followed by another cut in 1Q17," DBS said in the research note.

Though few experts anticipate a bigger 50 bps cut this week, DBS expects the authorities to take a more "measured cut".

The MPC, headed by RBI Governor Urjit Patel, in October had cut benchmark interest rates by 0.25 per cent to 6.25 per cent. The next RBI policy review is on December 7.

On the liquidity front, hopes are high that the central bank might withdraw the incremental cash reserve ratio (CRR) imposed on banks last week, the report added.

"The sharp increase in the Market Stabilisation Scheme (MSS) ceiling now provides a suitable alternative to the central bank, thus likely to see them tweak/ remove the CRR requirement this week," it added.

An estimated Rs 11 trillion worth deposits have been parked with the banks following the demonetisation drive, stoking liquidity, pushing down borrowing rates and bond yields as against Rs 8.5 trillion deposit raised between January-October this year.