Economists see no rate cut by RBI in 2017

Rate cuts in both India and US would squeeze the difference and could lead to an outflow

The US Federal Reserve's 25 basis points rate increase and its indication of two more rises in 2017 might have nixed the chance of the Reserve Bank of India (RBI) cutting its rate.

Being an emerging market that needs foreign portfolio funds to bridge its current account deficit, India needs to maintain a certain interest rate differential, to attract dollar investors. A rate cut in India and a rate hike in the US would squeeze that difference and could lead to an outflow. And, India's inflation rate is unlikely to remain soft in the coming months, as was evident from the cautious tone of the Monetary Policy Committee members from the minutes of their meeting.

So, it could be an extended pause for the Indian central bank, keeping the policy repo rate at 6.25 per cent, at least in this calendar year, and nudging banks to pass on earlier cuts. But, banks have largely ruled that out in the past. A rate cut at this point would not necessarily guarantee that banks would pare their own lending rates, considering that bond yields have been rising.

On top of that, RBI's latest policy review changed its stance from 'accommodative' to 'neutral'. This, say economists, suggests the end of a rate cut cycle. "This cycle is over," said Indranil Pan, chief economist at IDFC Bank.

Adds A Prasanna, chief economist at ICICI Securities Primary Dealership: "Our view is that there will be a prolonged pause (on rates) because RBI has clearly stated they have shifted to a neutral stance."

According to Deutsche Bank India economist Kaushik Das, RBI's inflation forecast indicates the scope for further cuts is no longer there. In its February 8 review, the central bank projected Consumer Price Index inflation at 4-4.5 per cent in the first half of the financial year and 4.5-5 per cent in the second half. "We don't have a rate cut expectation any more," said Das. "As far as inflation is concerned, we are already operating in the margin and don't know how the monsoon will pan out."

Globally, central banks are also moving away from an accommodative stance. This shift "will influence RBI to stay more cautious, even if it raises the risk of erring on the side of caution", says Barclays, the British financial services entity. It says it expects no policy change for the rest of calendar 2017.

Sounya Kanti Ghosh, group chief economist at State Bank of India, thinks there's an outside chance. "The probability is little but should not be completely be ruled out. Given the growth scenario, we won't be surprised if RBI goes for a cut in fiscal 2018," he said.