Will the RBI cut rates? Mixed views from brokerages

The Reserve Bank of India (RBI) will meet to review the Fourth Bi-monthly Policy tomorrow under its new Governor, Urjit Patel. The meeting comes against the backdrop of government nominating its members to Monetary Policy Committee (MPC) that is to take over the interest rate setting job from the RBI Governor.

 

With Consumer Price Index (CPI)-based inflation dropping to 5.1 per cent in August, the clamour for policy rate cuts has again increased. But will the RBI oblige?

Here is what leading research houses and brokerages think.

HSBC

The RBI has two objectives – to reach its 5% inflation target in early 2017 and keep real rates at the 1.5-2% range. Marrying the two would open up space for easing by 50 bps. We expect a 25 bps rate cut at both the December and February policy meetings.

 

There are some good reasons why a rate cut could materialise in the upcoming October 4 meeting. The recent fall in food prices has been sharper than expected, and cutting earlier keeps the RBI a safe distance away from possible Fed hikes. Yet, our base case is for a rate cut in December. This is because, by December, two new inflation prints which are expected to be well below 5 percent will be available. Moreover, given that the RBI was highlighting upside risks until its last meeting, it may prefer to move in steps, i.e. change the outlook on inflation now and cut rates in December.

MORGAN STANLEY

In India, given our expectation that inflation will moderate to 4.75% by the Mar-17 quarter, we consequently expect one more rate cut then. India and Indonesia are unlikely to take up additional fiscal expansion, but policy-makers in China and Korea could take up additional fiscal support measures if growth concerns emerge again.

NOMURA

The upcoming policy meeting on October 4 will be the first meeting under the new Governor, understanding the RBI’s stance towards its medium-term inflation targets and its approach to infusing liquidity into the banking system is critical. These dynamics will help formulate market expectations of the terminal rate and OMO (open market operation) purchases in coming months, which will be an important determinant of the yield trajectory.

KOTAK

We continue to see room for RBI to be more accommodative, with 25 bps cut in December and further scope if inflation surprises further on the downside along with comfortable liquidity position. We expect benchmark 10-year yield to ease towards 6.50-6.60% by end-FY2017.

EDELWEISS RESEARCH

We foresee 25bps cut in repo rate in the forthcoming monetary policy review on October 04, 2016. Recall, that the RBI maintained status quo in August, citing rise in inflation and upside risks to 5% projection of March 2017. Since then, headline inflation has fallen sharply and more importantly, further disinflation is in store over next few months as pulses prices deflate.

One may argue that the RBI would wait till December for further confirmation of disinflation trend, but we think the Monetary Policy Committee (MPC) will be uncomfortable cutting rates very close to a potential Fed rate hike.

Importantly, the forthcoming policy review will be the first one under the 6-member MPC and we would closely watch the views expressed by the 3 external (new) members to gauge its reaction function. Any clarity on MPC’s approach to 4% CPI target by March 2018 would be very welcome.