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The Reserve Bank of India (RBI) cut the interest rate on January 15 but market entities expect another in the next monetary policy review, scheduled for February 3.
While the softening of retail inflation provided RBI Governor Raghuram Rajan with room to cut rates in January, the government's renewed commitment to sticking to the mid-term fiscal roadmap provides room for further easing, say experts. The central bank's medium-term objective was to contain the rise of the Consumer Price Index-based inflation below six per cent.
"The April policy is too far and there are chances of a rate cut again in February 3. RBI appears to be reassured of the government's commitment to adhere to the fiscal deficit target and, hence, it might not wait for the Budget to deliver another rate cut," said Samiran Chakraborty, managing director and head of South Asia research at Standard Chartered Bank.
According to a dip-stick survey by Business Standard, one-third of market participants saw the possibility of a 25-basis point cut in the repo rate, the rate at which commercial banks borrow from the central bank, ahead of the Budget scheduled on February 28.
Earlier this month, RBI had reduced the repo rate by 25 basis points (bps) to 7.75 per cent. Before that, Rajan had raised the benchmark rate thrice from September 2013 to January 2014 and kept it steady at eight per cent for almost a year.
The CPI-based inflation rose five per cent in December 2014, compared with a rise of 4.4 per cent in the previous month, on a year-on-year basis. However, despite a rise in CPI inflation, it was below market expectations.
"We have a roadmap to bring fiscal deficit down a little below three per cent over the next couple of years and then we intend to maintain it," said Finance Minister Arun Jaitley at an event in Davos a few days ago.
The fiscal deficit for the financial year is pegged at 4.1 per cent of the gross domestic product (GDP) and 3.6 per cent in FY16 and three per cent in FY17. "The fall in crude oil and commodities prices has created buffer in terms of fiscal and monetary policy. The finance minister has gone on record that fiscal-deficit targets will be met and the policy statement by the RBI governor referred that once monetary policy stance shifts, subsequent policy actions will be consistent with this stance," said Manish Wadhawan, managing director and head of interest rates at HSBC India.
Quite a few experts have revised upward their rate cut forecasts, as they believe CPI inflation will stay at around five per cent for the most part of calendar year 2015 as the reduction in fiscal deficit, sustained deceleration in rural wages and lower global commodity prices will mean inflationary pressures in the economy will be contained.
