Deutsche Bank today said the Reserve Bank may cut policy rates by 0.25 per cent to 7 per cent at its September 29 meet as the prevailing economic conditions in the country are supportive for an easy money policy.
"Irrespective of the headline 7 per cent GDP which slowed from 7.5 per cent in the March quarter, it is clear from various high frequency indicators (PMI, credit growth, non-oil-non-gold imports, low capacity utilisation) that underlying economic momentum remains weak and may need further policy support to facilitate a robust recovery," the global financial services major said in a report.
However, the spillover risks from continued volatility in global markets or potential disorderly exchange rate movement in other emerging market currencies, can delay a rate decision by Governor Raghuram Rajan, "but that is not our base case scenario at this juncture," the report by its fixed income group added.
Citing the sluggish economic recovery as the main reason for a rate cut, the report noted that the Q1 GDP print moderated to 7 per cent from 7.5 per cent in the previous quarter, with net exports contracting and private consumption slowing down.
The bank, however, maintained its previous forecast of 7.5 per cent GDP growth for the year, but warned of "downside risks to this forecast, given a slower investment recovery and weak exports momentum."
The report noted that government's effort at front-loading public investment is not sufficient to boost growth, which is reflected from the Q1 GDP print.
Also, there is limited room to provide substantial fiscal stimulus, given the constraint on the fiscal deficit front.
It also noted the subdued inflationary pressure with CPI inflation coming down surprisingly to 3.8 per cent in July from 5.4 per a month ago.
If at all food prices increase 1.5 per cent monthly in August, CPI inflation should be around 3.8 per cent annually, due to a sharp fall in fuel prices.
"If CPI remains below the 4 per cent mark in August, as we expect, it will not be difficult for RBI to achieve its 6 per cent January 2016 CPI target," the report said, adding also, as WPI, (negative 4.1 per cent in July) is likely to remain so in the near-term, and GDP deflator is very low as well at 1.8 per cent for the June quarter.
A rate cut can benefit private sector credit growth, which has hit a multi-decade low, as per RBI's latest data.
Finally, the real interest rates in India are higher than its EM peers China and Indonesia. With reserves adequacy strength having improved materially, an incremental rate cut of 25 basis points is unlikely to pose any significant threat to the financial market and exchange rate stability, it added.
