DBS Group Research has revised its rate call to include 50 basis points more rate cuts by the Reserve Bank of India in 2015-16 (FY16), the first of which is likely this month. This comes in the backdrop of slower growth and faster-than-expected pullback in inflation.
Since the beginning of the current financial year, the RBI has cut the repo rate only once by 25 basis points from 7.50 per cent to 7.25 per cent on June 2 in the second bi-monthly policy review. Repo rate is the rate at which the central bank provides liquidity to banks to overcome short-term liquidity mismatches.
Last week, Radhika Rao, Economist with Singapore-based DBS Bank, said while the probability is low, any hawkish/cautious tones from the central bank could deflate sentiments further.
“Given easing inflation and waning growth momentum, pressure continues to build on the RBI to cut rates. It is likely to be a close call.
“We lean towards a rate cut at this juncture, but the RBI is likely to await: markets’ reaction to the US Fed meeting that will be held a fortnight before RBI’s; volatility in the markets; rupee movements, and monsoon progress,” she said.
DBS, in its latest report, said the key caveat to a rate cut is the external environment.
In the report, Rao observed that the timing of the RBI rate cuts will be influenced by the US Fed rate decision and China-linked volatility.
Assuming stable market conditions in the run-up to the September review and fading US rate hike risks, the RBI is on course to lower rates on September 29.