Inflation data for Jan-Feb and Union Budget to lead the way for more rate cuts: experts

Indian central bank RBI's decision to hold on to key policy rate while boosting liquidity met with expected thumbs down from the industry but economists feel RBI governor Raghuram Rajan stuck to the cautious stance and would like to wait through more economic data to snip it further.

Notably, RBI had sprung a surprise by cutting policy repo rate by 25 basis points (bps) two weeks ago. That had tilted the balance away from another anticipated rate cut in the sixth bi-monthly monetary policy review announced on Tuesday.

CII, one of the three prominent national industry bodies, said a 25 bps cut would have further lifted sentiments and assured the markets that the monetary easing cycle is on course which would be followed by further cuts in rates during the course of the year.

Ajay Shriram, president of the industry body, said he is looking to see 100 bps reduction in headline rates in the course of the year, “CII is hopeful that the RBI would resume its accommodative monetary policy stance in the next policy review and work in tandem with the government to bring the investment momentum back to the economy.”

The 30-stock benchmark index Sensex ended in the red, down 0.4 per cent on Tuesday.

Most analysts welcomed the RBI decision to maintain a status quo on policy rate with some believing that the next cut would only entail if the inflation outlook doesn't change drastically.

"It (rate cut) was not expected this time so I think if they do it next time it would all depend upon inflation numbers....it's very clearly stated that the RBI is looking at a real interest rate of 1.5-2 per cent, which means that depending on whatever the inflation rate is we need to add this particular number to see what is the RBI's level of tolerance,” said Madan Sabnavis, chief economist at credit rating agency CARE.

He added that if inflation (consumer inflation as captured by CPI) remains in the current range of 5-5.5 per cent he could expect a cut after the Budget. “In case it goes up for some reason, it may differ (RBI may hold on to rate cut again)," Sabnavis said.

The Union Budget is scheduled for February 28 while the inflation data for January will be out next week. RBI is scheduled to present the next monetary policy review statement on April 7.

Meanwhile, the central bank remained positive on the growth outlook owing to the disinflationary pressures, easier financing conditions and some progress on stalled projects but was cautious about the global economic outlook and the fiscal drag arising out of the compression in plan expenditure.

Radhika Rao, economist at DBS Bank, noted that the tone of RBI's statements was dovish, but cautious and highlighted that there are other risks.

“Fiscal slippage is still seen as a risk, which led the RBI to maintain the baseline CPI target of 6 per cent for FY16. This marks a change from the likelihood of being ‘below 6 per cent’ last month,” she said.

Radhika added that RBI's statement is also an acknowledgement of the shift in global dynamics and undercurrents of a renewed push to depreciate currencies. “This also reflects the RBI’s disdain with quantitative easing programmes (as ECB joined the bandwagon, just as the US Fed bowed out) and the associated risks to financial stability and asset markets. Against this background, the central bank probably prefers to keeps its powder dry by not undertaking aggressive rate cuts," she observed.

Umesh Revankar, chief of Shriram Transport Finance Company, one of the top NBFCs in the country, said, “Cutting the SLR by about 50 basis points is a positive as it gives banks additional funds for lending purposes. The MSME segment will get a boost as big corporate credit demand is not picking up and more liquidity would be available in the system. The policy rate remaining unchanged was as per the expectation and we hope the RBI would do the further reduction post the budget.”

(Edited by Joby Puthuparampil Johnson)

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