Goldman Sachs expects RBI to cut rates by a quarter percentage point in Feb

Goldman Sachs Group Inc. expects India’s central bank to cut interest rates by a quarter percentage point in February, the latest to add its voice to a chorus of calls for monetary policy easing.

The Wall Street bank said lower inflation projections, and expectations of a slower pace of U.S. policy rate hikes prompted it to shift its call from a previous forecast of no change in February.

The Goldman analysts, led by Chief India Economist Prachi Mishra, still expect the Reserve Bank of India to move back to a tightening mode in the second half of 2019 as the Federal Reserve continues to hike, and food inflation begins to pick up. Policy tightening is expected “to be delayed until the fourth quarter and to be shallower -- two hikes rather than three previously,” they wrote in a note.

The RBI adopted a hawkish policy stance in October, but is widely expected to drop that for a neutral bias at its Feb. 7 meeting as headline inflation consistently undershoots projections and economic growth slows. Inflation eased to an 18-month low of 2.2 percent in December, below the RBI’s medium-term target of 4 percent.

RBI Governor Shaktikanta Das, who chairs his first Monetary Policy Committee meeting next month, said on Friday that while food inflation had turned negative since October, the core measure -- which excludes food and fuel -- remained sticky at around 6 percent, posing a challenge to policy makers.

There’s still a significant possibility that the RBI could keep the rate on hold next month as policy makers gauge the progress on fiscal consolidation in the interim budget on Feb. 1, Goldman analysts. The market is pricing in a 100 percent probability of at least a 25 basis points rate cut by June, it said.