How much can RBI cut? Hopefully, 25 bps: Saugata Bhattacharya

Says only worry is inflation projections look a little optimistic, even factoring in a late and staggered phase-in of the 7th Pay Commission award

Two expectations from the Reserve Bank of India (RBI)'s policy review were a cut in the repo rate and an assurance of liquidity support to make transmission to lending rates more efficient. The central bank probably reckoned that the combination of latent risks did not justify an aggressive front-loaded cut in policy rates, and a 25-basis point (bp) cut was appropriate.

A continuing accommodative policy stance will keep hopes of further rate cuts alive.

How much can RBI cut in the future? Hopefully, another 25 bps. The only worry is inflation projections look a little optimistic, even factoring in a late and staggered phase-in of the Seventh Pay Commission payouts. The critical presumption seems to be a normal monsoon, which will support government measures to contain food inflation.

In the near term, relaxed daily cash reserve ratio (CRR) maintenance for banks will reduce volatility in demand for liquidity.

But the more significant change is the progressive move from a structural liquidity deficit to "a position closer to neutrality", which is a de facto relaxation of the liquidity management framework.

A surprise Open Market Operations announcement, alongside the policy, emphasised this intent.
Saugata Bhattacharya
Senior vice-president, chief economist, Axis Bank