The Reserve Bank of India will most likely wait for the Union Budget before making further rate cuts.
Having cut the repo rate (the interest rate at which the RBI lends short-term money to banks) to 7.75 per cent from 8 per cent barely 20 days ago, the central bank may maintain status quo on this front when it announces its sixth bi-monthly monetary policy review on Tuesday.
According to Union Bank of India Chairman and Managing Director Arun Tiwari, the central bank may wait for cues, including on fiscal consolidation, from the Budget before easing the policy rate further. When it cut the repo rate in mid-January, outside the policy review cycle, the RBI reasoned that a host of factors had provided headroom for a shift in the monetary policy stance (towards a softer interest rate regime). These factors include a sharp decline in prices of vegetables and fruits, and in international commodity prices, particularly crude oil.
“Crude prices, barring geo-political shocks, are expected to remain low over the year. Weak demand conditions have also moderated inflation, excluding food and fuel, especially in December. Finally, the government has reiterated its commitment to adhering to its fiscal deficit target,” the RBI said.
A CARE Ratings report said while the road ahead will see further interest rate cuts, there may not be a pressing need to do so again on Tuesday.
The report said the thrust of the Budget announcement on February 28, the borrowing programme, and “the RBI’s own conjectures of movements in deposits and credit in FY16 would have a bearing on the phasing of rate cuts process”. However, if the RBI does cut the rate by another 25 basis points, the rating agency said it can be surmised that it was the initial plan to cut rates by 50 basis points in two tranches. The agency pointed out that while some banks have lowered their deposit rates, only a few have cut lending rates. The market believes that these cuts will be invoked in March. HSBC Global Research said with 25 bps of (rate) cut already delivered, it expects the next 25 bps cut in mid-March, after the Budget and the February Consumer Price Index inflation.
“While a rate cut is on the table next week, our base case is for the RBI to ease next in March, after just having delivered a surprise cut. We expect the final cut at the June policy meeting, when we expect meteorologists to know with some degree of confidence if the monsoon will be normal,” it said.
Saugata Bhattacharya, Chief Economist of Axis Bank, said the RBI may look at some measures relating to the banking sector operations, though nothing big is expected before the Budget. All big measures could be only in the annual policy.