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After Tuesday's dovish policy, we expect Reserve Bank of India (RBI) Governor Raghuram Rajan to cut rates by 25 basis points on June 2. Looking ahead, RBI will likely pause after June to monitor the US Federal Reserve's rate actions in September. Another cut of 50 basis points can be expected in early 2016.
We continue to pencil in another 75 basis points of policy rate cuts in the next 12 months, with inflation trending well below RBI's below-six per cent target. Although winter rains could pose a temporary upside risk, Delhi will likely prefer to respond with supply measures rather than RBI action. We think concerns over "transmission" are overdone. Can banks cut lending rates in the peak February-March busy season? With the slack season setting in, lending rates should come off by 25 basis points. That said, RBI will also need to step up reserve money expansion to engineer softer lending rates to push up credit offtake. Finally, RBI will likely continue to buy FX to guard against any contagion. With the dollar strengthening and seasonality turning against the rupee, RBI might try to hold the Indian currency at 60-65 levels against the greenback.
Indranil Sen Gupta
India economist
Bank of America Merrill Lynch
India economist
Bank of America Merrill Lynch
