RBI to cut interest rate by 25 basis points, say experts

Zee Research Group

Finance Minister P Chidambaram has done his part of presenting a credible road-map to contain fiscal deficit in a rather difficult year. Now, it is up to the Reserve bank of India (RBI) to complement his efforts by slashing policy rates. Although the latest headline inflation rate rose to 6.84 per cent after falling to a three-year low of 6.62 per cent in January 2013 yet experts seem to be unanimous for the rate cut decision.

Commenting on the precarious situation of economy and a possible rate cut, DK Pant, director, Fitch Ratings, said, “We expect RBI to slash policy rate by 25 basis points (one basis point is one hundredth of a percent). Based on the declining trend of core inflation and looking at the falling growth, we expect some support to be provided by RBI in terms of monetary easing. The government has shown some intent to control fiscal deficit by providing a fiscal consolidation road-map. Hence, there are expectations that RBI may opt for gradual monetary easing. In the next fiscal (2013-14), we are expecting rate cut of nearly 50 basis points.”

Ebbing GDP growth, easing core inflation and a controlled fiscal deficit are the key factors which can prompt RBI to cut policy rates. However, uncomfortable levels of food inflation, doubt over the sustainability of trade deficit data are some facts which can deter RBI from cutting policy rate on March 19 when it announces the mid-quarterly policy review.

Throwing light on the possible action expected out of RBI, Brinda Jagirdar, consulting economist (former chief economist at SBI), said, “There is a strong possibility that policy rates would be reduced by 25 bps. At 4.5 per cent growth rate we have to put all efforts to ensure that growth picks up in the economy. Everyone is doing his best and now monetary policy should step in to revive growth by cutting rates. It may also be accompanied by cut in CRR (Cash Reserve ratio). There will be two more rate cuts in next fiscal (2013-14) and the total quantum would be around 50 bps.”

However, AK Prabhakar, Senior vice-president, equity research at Anand Rathi Financial Services has a different view point and argued, “There would be a status quo situation as we are not expecting any rate cut or CRR (Cash Reserve ratio) cut in the upcoming policy meet. However, we are expecting policy rates to get slashed by 50bps cut in May Policy. Food inflation is still in double digit which is a major concern. In the next two months it should come down to single digit where even base effect will come in play which will trigger the rate cut by RBI.”

Another school of thought came from, DK Joshi, Director and Principal Consultant, CRISIL, who averred, “A repo rate cut of 25 bps is expected out of the event. Fiscal policy is becoming tighter and the recent decline in core inflation provides a leg room to RBI in tinkering down the repo rate. Core inflation fell below the 4 per cent mark for the first time in past 35 months. However, any possibility of reducing CRR seems to be negligible.”

In sync with Joshi, Saugata Bhattacharya, chief economist, Axis Bank, said, “There is a possibility that RBI may slash rate cut by 25 bps. Slowing growth, easing inflation, and fiscal deficit consolidation are some reasons which can be attributed to the expected rate cut. However, there is a low probability of CRR cut. In the remaining period of 2013, one can see repo rate to get reduced by 25 -50 bps.”

Not only economists but DEA Secretary, Arvind Mayaram has also pitched for the rate cut. However, the subdued investment demand in the country has emerged as a common worry amongst the analyst fraternity. They believe that this time the process of economic growth has to be led by government. It needs to be initiated by large investments in infrastructure and manufacturing.

“Although investment demand depends on interest rates yet there are other parameters which affect it. There are other bottlenecks like land acquisition approvals, environment clearances etc which should be removed. Furthermore, stable tax regime is required to revive investment demand. If these conditions are met then there is a possibility that investment demand may revive,” affirmed Pant at Fitch.