Singapore's DBS bank expects RBI to lower repo rate

Singapore-based DBS bank today said it expects the RBI to lower the repo rate by 25 basis points (bps) to 7.0 per cent, with the fixed corridor to take the reverse repo to 6 per cent tomorrow.

"This will mark the fourth rate cut this year, after a cumulative 75 bps between January-June 2015," the bank said in its daily economic report.

Earlier, the policy outlook for second half of the calendar year was clouded by the US Federal Reserve's rate direction, Chinese yuan-led volatility and fallout of a weak monsoon. Receding risks on these counts and sufficient domestic catalysts are likely to prod the central bank to lower rates this week.
 

Commodity prices (INR terms) have eased further, with the CRB index (Thomson Reuters/ Core commodity index) down 1.5 per cent since August.

Inflationary expectations are also expected to ease in September, mirroring the global commodities' down move. From a high of 7 per cent year-on-year a year ago, CPI inflation fell to 3.7 per cent in July and August.

At August's review, the RBI had emphasised that it would look through base-effect-distorted inflation readings in these two months but the slower-than-expected sequential pace probably took it by surprise.

"Moreover, our estimates suggest that the impact of below-normal monsoon lasts for 3-4 months, implying that inflation will likely stay within 5.0-5.5 per cent through December," the report said.

"Better policy transmission should also help. To improve the sensitivity of retail rates to policy changes, the RBI proposed a regulatory change whereby banks would need to consider marginal cost of funds to calculate lending rates," it added.

Apart from the policy meeting, August fiscal deficit numbers will be released on September 30. Despite strong indirect tax collections, the April-July fiscal deficit has already accounted for 70 per cent of the full-year target.

A third of the budgeted expenditure has been disbursed, with more to be front-loaded to boost public sector capex and infrastructure spending, the report said.

"With direct tax revenues slow to catch-up, we expect the fiscal position to remain under pressure over the next couple of months. Given the government's emphasis on fiscal consolidation, risks of overshoot of targets will be mitigated by expenditure cuts to stay within the -3.9 per cent of GDP red line," it added.