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While the reserve bank of India cut its repo rate by 25 basis points to 7.25% it kept the CRR unchanged at 4%.
The forward guidance of the RBI post rate cut remained cautious in the back of significant upside risks to inflation, the current account deficit (CAD), and its financing, all limiting space for further easing of interest rates.
In the backdrop the Nomura Economists (Sonal Verma and Aman Mohunta) though observe that overall, the balance of risks stemming from the Reserve Bank’s assessment of the growth-inflation dynamic yields little space for further monetary easing,
However in their view, "given the recent fall in commodity prices and the slow rate-cutting cycle, upside risks to inflation are likely to remain contained against a backdrop of weak growth, creating more space for future rate cut”
A similar view is echoed by many others.
The HSBC economist’s also feels that while the room for further monetary policy easing has essentially been exhausted for now, in our view, it cannot be ruled out that the RBI may still fire another small salvo in coming months.
However, cutting rates further poses inflationary risks considering that monetary policy settings are now accommodative while capacity is relatively tight in the supply-constrained economy. Any further easing, therefore, has to be approached with caution.
Dr Tirthankar Patnaik, Director, India Strategist and Chief Economist, Religare Institutional Research though also feels that the RBI’s FY14 annual credit policy maintains a cautious stance on inflation, targeting a 5% figure for March 2014, even as it conceded inflation risks had receded in the near-term, FY14 growth at 5.7% is meaningfully lower than the Governments 6.4% figure, and unlikely to revive in a hurry.
Thus he adds that while the 25bps cut on the repo and leaving the CRR unchanged were both on expected lines, we expect further easing this year, as the central bank responds to weaker growth. Overall we expect another 75bps on the repo this fiscal, but maintain that the key remains effective monetary transmission."
