When Is The Next RBI Rate Cut Due? Economists, Market Experts Divided

The Reserve Bank of India in its bimonthly monetary policy review left the benchmark interest rates unchanged, but lowered its inflation projection for the current year, making room for a rate cut in the near future.

The central bank also made a slew of announcements which were not completely related to the policy review. It tightened regulations around the overseas rupee-denominated or masala bonds. It also relaxed provisioning norms for banks giving home loans to push housing credit.

All economists that BloombergQuint had surveyed expected the RBI to hold rates. Here’s what economists, brokerages and the like make of RBI’s announcements on Wednesday...

‘Hopes Of A Rate Cut This Year’

The policy review was largely in line with expectations, said Keki Mistry, vice chairman and chief executive officer of HDFC Ltd. However, the RBI’s statement on the possibility of an accommodative stance going forward would trigger an expectation of a rate cut in the market, he said.

Mistry said the other announcements such as easier provisioning norms for housing loans was a positive. He said that the reduction in statutory liquidity ratio by 50 basis points was “a bit surprising”, adding that it is unclear to what extent that would benefit the banks.

‘Rates On Hold Till March 2018’

The RBI is expected to leave rates unchanged till March 2018, which could be followed up with rate hikes of up to 50 basis points starting from April 2018, according to brokerage house Nomura.

It expects headline consumer inflation to remain low in the near term due to lower food prices and the extended disinflationary effects of demonetisation, a note by the brokerage after the monetary policy announcement said.

‘RBI Done With Rate Cuts’

The Reserve Bank of India will probably not make any further rate cuts in the current cycle, according to Chentan Ahya of Morgan Stanley. He expects the central bank to hold rates.

Morgan Stanley expects inflation, which has now undershot RBI's medium-term target, to go back up as the headline inflation is low only due to food inflation. The RBI does not get confidence to cut rates just based on the food inflation, Ahya told BloombergQuint.

At current levels, Morgan Stanley expects growth to accelerate and remain around 8 percent in the second half of the calendar year while inflation is likely to normalise around 3 percent for 2017-18, Ahya said.

Also Read: RBI Done With Rate Cuts For Remainder Of The Year, Says Morgan Stanley’s Chetan Ahya

'Unlikely That RBI Will Hold Rates For Long'

With most risks to inflation on the downside, it will be difficult for the RBI to hold rates for long, said Soumya Kanti Ghosh, chief economic adviser at State Bank of India, in a report following the policy review.

He expects inflation to be at 2 percent, or lower, in the coming months.

Ghosh wrote that the downward adjustment of RBI's inflation projection is a message that the central bank's inflation forecasting was widely off the mark. He added that its previous policy statements could have forced it to not cut rates on Wednesday.

‘Incoming Data Important Now’

Each set of incoming data, from wholesale price inflation to consumer price inflation and industrial production, will become more and more important for the RBI while assessing its policy stance, according to Upasana Bhardwaj, a senior economist at Kotak Mahindra Bank. She expects the core inflation will not be as sticky as the RBI fears.

She said it was a positive that the RBI finally acknowledged the downside to the inflation trajectory.

‘Rate Cut In August’

Jayesh Mehta of Bank of America-Merrill Lynch reiterated his call for a rate cut in August.

He said the decisions taken by the RBI to tighten norms for the rupee-denominated or masala bonds will plug the regulatory arbitrage while also aligning masala bonds with the European Central Bank’s guidelines.

Also Read: RBI Made Large Inflation Forecast Errors, Arvind Subramanian Says

‘Need To Accelerate Growth’

With geopolitical concerns around U.S. elections, Brexit and other European elections fading away, the central bank should now commit to a long-term view for accelerating growth, said Shishir Baijal of Knight Frank India.

Baijal expected a “growth-inducing dovish stance” by the RBI as inflation numbers remained benign.

‘Push To Housing Loans’

The RBI's acknowledgement of the downward trajectory of inflation as it cut its projection for the year is a welcome move, according to Chanda Kocchar, managing director and chief executive officer of India's largest private lender ICICI Bank Ltd.

The other announcement around the SLR cut and reduction in risk weights of housing loans are positive moves that will “support bank liquidity” and “encourage growth in housing loans”, she said.

‘Rates To Be Unchanged In Foreseeable Future’

A rate cut in August is not a done deal, according to Abheek Barua, chief economist at HDFC Bank Ltd. He noted the RBI’s strict adherence to its 4 percent inflation target is to keep inflation expectations at a subdued level.

If “strict inflation targeting” is indeed what the RBI is pursuing, then policy rates could remain unchanged in the foreseeable future, Barua said in a note following the policy review. This could also be a case of the RBI being reluctant to change its stance so soon, he said.

Barua also expects bond yields to settle around 6.8 percent by the end of this year

‘25-Basis-Point Cut In August’

Ratings agency CRISIL said that there are “increased chances” of a 25-basis-point repo rate cut in the August 2 monetary policy review.

The ratings agency has lowered its inflation forecast to 4 percent from 5 percent earlier for financial year 2017-18 due to the downside from food inflation, it said in a statement after the policy review.