RBI’s surprise move kick starts a big rate cut cycle, say experts

The RBI's move to cut interest rates by 25 basis points today is a beginning of big easing cycle and it could go for further cut of 1.25 percentage points in policy rates over the next 12 months, say experts.

According to experts, faster-than-expected decline in inflation in recent months and easing inflation expectations provided comfort to the central bank and this surprise rate cut is an advancement of the February policy action.

According to global brokerage firm Morgan Stanley, this is a beginning of a big rate cut cycle.

"We expect a further 125 bps over the next 12 months, cumulative 150bps in this cycle (compared to its earlier forecast of 50bps rate cuts)," Morgan Stanley economist Chetan Ahya said in a research note.

Ahya further said that there is a possibility of a further rate cut of 25bps in the next monetary policy review on February 3. "We expect the RBI to front load the rate cuts by potentially taking up a 50bps rate cut in one of the monetary policy meetings after February 3," he added.

HSBC Chief India Economist Pranjul Bhandari said, "we expect the RBI to cut rates by another 25 bps after the end-February budget announcement. Given the move today, this could well happen in March, between the scheduled meetings of February and April."

Experts said the onus is now on the government to revive capital expenditure and growth in a fiscally disciplined way, so as to allow the RBI space for cutting rates.

Bhandari said RBI may not be able to cut by more than 50 basis points in 2015.

"However, if oil prices fall further, normal monsoons and better public food management lead to a sustained fall in food prices and growth remains sluggish for longer, more space for rate cuts could open up," she said.

The RBI cut the policy rate by 0.25 per cent a few weeks ahead of its regular monetary policy meeting, which is scheduled to be held on February 3. Governor Raghuram Rajan lowered the benchmark repurchase rate to 7.75 per cent from 8 per cent, the first reduction since May 2013.

The RBI rate cut follows decline in inflation as well as the commitment of the government to stick to the fiscal deficit target of 4.1 per cent of the GDP in the current financial year.

"We expect another 25bp rate cut to be delivered in April after the February-end budget, followed by a prolonged pause," Sonal Varma, India Economist at Nomura said.

As a result the reverse repo rate, the rate at which the central bank drains excess liquidity from the banking system, also moved down by 25 basis points to 6.75 per cent.

"The RBI's surprise move of 25bps cut in repo rate marks a regime shift in policy stance. Hereon, growth objective will gain precedence even as policymakers keep a firm eye on inflation," leading domestic brokerage firm Edelweiss said in a research note.

"We foresee further 100-125 bps easing by March 2016 based on behaviour of the yield curve and real rates over business cycles," Edelweiss added.

Notably, the RBI Governor had highlighted back in December that as and when policy direction shifts, subsequent action should be 'consistent with the changed course'.

"This demonstrates their confidence on the evolving inflation outlook, much due to the way global commodity prices are shaping up," DBS Bank Economist Radhika Rao said.

"This suggests that today?s move is unlikely to be an one-off (barring the small probability of a sharp reversal in crude prices). Hence, today?s cut possibly paves the way for another 50bps cuts heading into FY16, provided the pre-conditions of quality fiscal correction and waning inflation risks hold," Rao added.

Commenting on the RBI's move, Soumya Kanti Ghosh, Chief Economic Adviser & GM, Economic Research Department, SBI said "this means that this could be just the beginning of a rate easing cycle" and adding that the next rate cut could happen in April 2015 and cumulatively, 75-100 basis points is envisaged in FY16.

Meanwhile, Tirupur Exporters Association President A Shaktivel termed RBI's move as a positive step and said it has come at a time when Tirupur knitwear garment exporters has been picking up momentum.

He expressed the hope that banks would pass on the benefits of this 'pongal gift' to consumers with immediate effect.

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