Taking cue from declining core inflation levels and sluggish growth trends, the Reserve Bank of India is likely to cut key policy rates by 0.25 per cent in its mid-quarter review on March 19, global investment banking majors have said.
Even if RBI cuts rates on Tuesday, the tone of monetary policy guidance is unlikely to change significantly, they said, adding that policy guidance is likely to be “cautious”.
According to global banking giants HSBC, Standard Chartered, Citigroup, Barclays and Credit Suisse, RBI is likely to slash the repo, or short-term lending, rate in its review meeting.
The factors that are likely to act in favour of a slash in rate cuts include a narrower February trade deficit, adherence to the fiscal deficit target in FY 2013, a slowdown in GDP growth to decade-low levels, and a fall in core inflation to below 4 per cent for the first time since April, 2010.
“Though wholesale price-based inflation at 6.84 per cent in February was marginally higher than expected, we maintain our view of a 0.25 per cent reduction in the repo rate to 7.50 per cent next week,” Standard Chartered economist Anubhuti Sahay said in report.
Barclays Capital economist Siddhartha Sanyal in a research note said that “if the increase in lPG and diesel were not implemented, then we estimate that WPI inflation for February would have been close to 6.3 per cent, underpinning the downward trajectory that started in October 2012”.
Citi India Chief Economist Rohini Malkani said: “We maintain our view of a modest 0.50 per cent easing in rates in 2013, with a 0.25 per cent cut on March 19.”
lingering inflation pressures and the still wide current account deficit limits the scope of RBI to ease monetary policy, experts believe.
The current account deficit (CAD) represents the difference between inflows and outflows of foreign currency. The CAD had touched a record high of 5.4 percent of GDP in the July-September quarter.
“Headline WPI inflation rose more than expected due to increases in administered fuel prices. However, core inflation continued to ease, which will help pave the way for another RBI rate cut next week,” HSBC Chief Economist (India and ASEAN) leif Eskesen said. Analysts also pointed to the comment made by Prime Minister’s Economic Advisory Council Chairman (PMEAC) C Rangarajan in an article last week that the economy is heading towards a stagflationary situation, with high inflation and decade low growth.
“It is pertinent to note that stagflationary tendencies have already reared their head in emerging markets, like India, where financial intermediation was never a problem,” Rangarajan has said in a paper titled RsGrowth or Austerity: The Policy Dilemma’ co-authored with Alok Sheel.
On the other hand, Reserve Bank Governor Duvvuri Subbarao said at the lSE last week that inflation at over 6 per cent in fact demands more tightening and not easing.
However, analysts remain optimistic. Crisil said: “Core inflation – an indicator of demand side pressures on prices – fell below the 4 per cent mark for the first time in past 35 months, strengthening the case for a repo rate cut by RBI on March 19.” It expects a 25 bps cut in the repo rate on Tuesday.
India Ratings also said RBI is likely to cut the repo by 0.25 per cent. “RBI may gradually ease the monetary policy given the decline in core (non-food manufacturing) inflation to 3.8 per cent in February,” it said, adding the central bank will cut rates by up to 0.75 per cent in the next fiscal.
“The upward pressure on headline inflation is on back of upward revision of diesel prices and further decision to adjust prices on monthly basis introduced by government in mid-January 2013,” a note from Care Ratings said.
However, some experts also point to the retail inflation numbers, which rose to 10.9 per cent in February.
Nomura expects the next repo rate cut on May 3, not March 19. So does Morgan Stanley. It expects RBI to hold rates steady on Tuesday, saying the consumer price index remains the “most important measure” compared to the wholesale price index, leading to “elevated and sticky inflation expectations.
Meanwhile, Credit Suisse Director Robert Prior- Wandesforde expects RBI to slash the repo or short-term lending rate on Tuesday by 25 bps.
He said he expects the monetary authority to slash the repo, as he “doubts that either of the IIP rise and retail inflation will prevent the RBI from cutting the repo (and cash reserve ratio) by another 25 bps March 19, while we are also looking for a 25 bps reduction on May 3”.
Explaining the rationale for this optimism, he said the disappointing Q3 GDP data of just 4.5 per cent, and the fact that Finance Minister P Chidambaram has stuck to his budgetary commitments are likely to carry more weight in the context of a WPI rate, which is trending lower. PTI