Analysts see more rate cuts next fiscal

But it warned that banks are unlikely to lower lending rates immediately as deposit growth is weak and the cost of borrowings remains high.

Mumbai: In spite of the Reserve Bank on Tuesday sounding hawkish about more rate cuts, most analysts and economists at rating agencies and investment banks expect another 25-75 bps easing through the course of the year.

Stating that the room for further rate cuts is limited, Crisil said, "with CPI inflation remaining high and WPI inflation still above RBI's threshold of 5 percent, we expect RBI to reduce policy rates by at most 25-50 bps next fiscal."

But it warned that banks are unlikely to lower lending rates immediately as deposit growth is weak and the cost of borrowings remains high.

However, it doubted today's 25 bps repo cut oiling the "squeaky wheel" of the economy saying "lower interest rates can effectively oil the economy only when other major causes for the squeaking wheel are fixed.
This involves sorting out issues such as delays in land acquisition, forest and environmental clearances, and supply of raw materials that continue to drag down implementation of projects."

Kotak Bank's Indranil Pan also said despite the hawkish tone in the policy statement, he still sees a 25 bps cut in the repo rate on May 3.

Describing the tone of the policy statement as mixed, Deutsch Bank, too, said there are at least two more cuts (25 bps each) by May 3 and mid-June, but after that the cycle may well come to an end unless the growth-inflation nexus turns out to be poorer.

"We see today's guidance as a hedge against expectations of further cuts, but we think ultimately the need to support growth and asset markets would prevail, and further easing lies ahead," it said.

Credit Suisse director Prior-Wandesforde also said despite worrying guidance "we continue to look for another 75 bps repo rate cuts in the year as they feel that food inflation is likely to come off in due course and so is the external deficit which has already begun to turn the corner".

He also said they are looking for a CAD of 3.5 percent in FY14, down from its projection of 4.6 percent this fiscal.

For May 3, he said, "we are sticking to the view that a further 25 bps repo cut will be delivered".

Head of rating agency Icra Naresh Thakkar said even though RBI is hawkish, the policy stance remains tilted towards boosting growth, and therefore expects another repo rate cut of 25-50 bps during 2013.

However, leading investment bank Goldman Sachs said it did not see any more rate cuts this year, saying "the RBI statement is hawkish, highlighting concerns about inflation and current account deficit and points to the unrelenting rise in food inflation, and suppressed inflation related to administered prices which carry latent inflationary pressures."

"We continue to expect no more rate cuts in 2013. The hawkish statement by RBI corroborates our view, and we think market expectation of over 50 bps repo cuts in 2013 from here will gradually come down as continuing upside risks to inflation and an elevated CAD in the near term will make it extremely difficult for RBI to justify easing policy rates."

Goldman also said RBI disappointed by not cutting the CRR as the system is choked with banks daily borrowing over Rs 1.4 trillion from the repo window.

Rating agency India Ratings chief economist Devendra Kumar Pant termed the policy as cautious easing with a tilt towards boosting growth said it expects 50-75 bps more easing through the course of the next fiscal.

"The fiscal and monetary policies are now moving in tandem to address growth concerns. Fuel price reforms, especially in diesel, will continue to exert pressure on headline inflation but we expect core inflation to decline further," Pant said.

Brokerage Nomura's chief economist Sonal Varma said the window for rate cuts has been nearly closed but expect 25 bps repo cut on May 3 and the rates to remain on hold thereafter due to rising risks on the external sector.

Barclays' Siddhartha Sanyal is also expecting 50 bps cut by mid-2013 despite the near-term mixed guidance.

"We feel that RBI followed its usual line of sounding cautious and trying to contain expectations of further reductions in policy rates while delivering easing. While its concerns on stickiness of retail inflation and expectations are well-founded, we feel that upcoming macroeconomic data will demand further monetary easing going ahead," Sanyal said.

HSBC's Leif Eskesen said "while RBI remains apprehensive about inflation, it saw a few reasons to deliver another rate cut. Growth has been too low for comfort and core WPI inflation has eased over the past few months on the back of softer global commodity prices.

"However, room for further easing is relatively limited and would be contingent on inflation risks receding, twin deficits narrowing, and the reform push persisting."