Friday's monetary policy statement from the Reserve Bank of India (RBI) was, on balance, cautious. We think despite the lingering hawkish tone, there is scope for a number of rate cuts this year. The central bank's belief expressed in on Friday's statement that "upside risks to inflation are still significant in the near term" is not shared by us, primarily because we think weakening growth and the prevailing bearish trend in commodity prices more than offset such risks.
To us, key issues likely to dominate the discourse in India this year are continued decline in growth, investment, and savings. We think that the central government and RBI will be increasingly focused on these matters than inflation in the coming months.
Risks of a disorderly adjustment of the rupee, spike in inflation, and excessive consumption demand are worth monitoring, but those risks have receded considerably, in our view.
Indeed, we see inflation heading to five per cent in the second half of this year under a baseline scenario but below four per cent under an alternative scenario with non-trivial probability. As data in the period ahead show persistent weakness in growth and price pressure, we expect the central bank to continue to be vigilant about the outlook, but at the same time finds itself compelled to cut rates.
We now expect three additional 25 basis points (bps) rate cuts this year (June, July, and September), which will take the repo rate down to 6.5 per cent when the cycle concludes. We expect substantial liquidity operations to complement the rate cuts, and hence rates may ease by more than 100 bps in effective terms. Lower rates may not be sufficient to revive growth, but they are necessary, in our view.
To us, key issues likely to dominate the discourse in India this year are continued decline in growth, investment, and savings. We think that the central government and RBI will be increasingly focused on these matters than inflation in the coming months.
Risks of a disorderly adjustment of the rupee, spike in inflation, and excessive consumption demand are worth monitoring, but those risks have receded considerably, in our view.
Indeed, we see inflation heading to five per cent in the second half of this year under a baseline scenario but below four per cent under an alternative scenario with non-trivial probability. As data in the period ahead show persistent weakness in growth and price pressure, we expect the central bank to continue to be vigilant about the outlook, but at the same time finds itself compelled to cut rates.
We now expect three additional 25 basis points (bps) rate cuts this year (June, July, and September), which will take the repo rate down to 6.5 per cent when the cycle concludes. We expect substantial liquidity operations to complement the rate cuts, and hence rates may ease by more than 100 bps in effective terms. Lower rates may not be sufficient to revive growth, but they are necessary, in our view.
Taimur Baig
Chief Economist, India, Deutsche Bank