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The Reserve Bank of India (RBI) has delivered successive rate cuts this year, taking the repo rate down to 7.5 per cent. The cycle was to be shallow, with 50 basis points (bps) being cut through calendar 2015, on risks emanating from a possible rate hike by the US Federal Reserve. However, the breakdown of oil and rising risks of deflationary pressures have given RBI more space to cut the rate by 50 bps in less than two months. The central bank cited the trend of global easing and weak growth for its “anticipatory” cut.
How many more are likely? Economists are divided on this. The cautious ones expect RBI to cut another 25 bps by June and then pause. Others expect 50 bps before the US Fed starts its tightening cycle later this year.
HSBC Global Research believes RBI has space for a 25 bps cut, which could materialise in the June policy meeting. Crisil Research expects a 50 bps cut in FY16, as does the rest of corporate India, with a likelihood of these being front-loaded.
Morgan Stanley, accurate in its predicting a second rate cut after the Budget, expects RBI to cut rates by a further 100 bps through 2015, with the next move during the April 7 meeting. Chetan Ahya and Upasana Chachra of Morgan Stanley base their forecast on the rationale that RBI will target real rates of 175 bps and, thus, inflation trajectory will be critical for further cuts. They expect the inflation to slow to 4.75 per cent by end-2015, which would result in rate cuts of 100 bps.
While nobody rules out a rate cut in FY16, if prices and the fiscal deficit are not reined in, RBI might be forced to reverse its rate action next year.
