Markets keep divergent views on policy rate cut

November 22, 2014 11:34 pm | Updated April 09, 2016 11:15 am IST - MUMBAI:

The Reserve Bank of India (RBI) is set to review its monetary policy early next month on the backdrop of positive macroeconomic signals — inflation under control, improved balance of payments (BoP), comfort on fiscal deficit and steady improvement in the Index of Industrial Production (IIP).

The current economic conditions prompt markets to believe that the RBI is likely to cut rates in the ensuing monetary policy review. The Finance Minister has also recently indicated that the time is now matured for easing the interest rates to boost growth.

However, the RBI Governor’s priority for controlling inflation, especially the Consumer Price Index (CPI) based, is well known.

“Knowing his firm stance so far, he may still hold back the rate cut till next review,” said Ramesh Kelkar, Head, Credit & Risk (wholesale and SME lending), Capri Global Capital Ltd. But, Mr. Kelkar said, the RBI Governor had to acknowledge that there was a case for policy rate cut as CPI-based inflation was quite under control for good time now.

“In that case, it is expected a policy rate cut of 50 basis points (bps), may be in two phases, now 25 bps and in January/February another 25 bps,” said Mr. Kelkar, adding that the policy rate cut, which is long awaited, would hold up the market sentiment, boost the demand for bank credit and take the economy on growth trajectory.

CPI inflation in October moderated below the January, 2016, target of six per cent, and is expected to ease further in the ongoing month, benefiting from the favourable base effect.

“While the decline in domestic fuel prices and easing global prices of other commodities will have a limited first round effect on the CPI, they may soften the impact of any revival in demand conditions going forward,” said ICRA Senior Economist Aditi Nayar.

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