People stand in line to exchange Indian five hundred and one thousand rupee banknotes outside the Reserve Bank of India (RBI) headquarters in New Delhi, (Photographer: Anindito Mukherjee/Bloomberg)

Half-Point India Rate Cut Seen by Economist Amid Cash Chaos

(Bloomberg) -- Ashutosh Datar, the most accurate India interest-rate forecaster, is predicting a half-a-percentage-point cut on Wednesday that is more aggressive than the consensus estimate as the government’s currency recall risks slowing the economy.

“The rationale is simple: growth prospects have worsened post the demonetization drive while the pace of inflation is falling,” said Datar, an economist at Mumbai-based brokerage IIFL Institutional Equities Ltd. In September 2015, he was the only one among 52 analysts surveyed by Bloomberg to correctly predict the Reserve Bank of India’s 50-basis point cut.

Prime Minister Narendra Modi’s surprise Nov. 8 measure, designed to hurt those with unaccounted wealth by invalidating 86 percent of India’s currency in circulation, threatens to dent demand in an economy where almost all consumer payments are made in cash. Credit Suisse Group AG, Deutsche Bank AG and Standard Chartered Plc are among banks that have slashed full-year growth forecasts for Asia’s third-largest economy.

The monetary policy committee led by RBI Governor Urjit Patel will lower the repurchase rate by 25 basis points to 6 percent on Dec. 7, according to 31 of 44 economists in a Bloomberg survey. Eight expect no change, while Datar and four others see a reduction to 5.75 percent.

Benchmark 10-year sovereign bonds last month capped their best performance since April 2009 and one-year rate swaps slumped as consumer-price inflation slowed to a 14-month low of 4.20 percent in October. The median estimate in a separate Bloomberg survey conducted from Oct. 21 to Oct. 27, before Modi’s move, showed economists had forecast no change in the repo rate this week.

Half-Point India Rate Cut Seen by Economist Amid Cash Chaos

“We were seriously not expecting a December rate cut but with the coming disruption in growth due to demonetization, we are calling for a reduction,’’ said Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai. “There is going to be a hit on growth.”

Bonds have surged as the currency recall had citizens rushing to banks to deposit the defunct notes, flooding the financial system with cash and boosting demand for debt. The 10-year yield sank 55 basis points in November and is down 156 basis points in 2016 at 6.20 percent.

A half-point rate cut on Wednesday “may see yields on the 10-year benchmark bond dropping another 10-20 basis points over the next three, four months,” said Datar, whose predictions have been most accurate in contributed surveys over the past two years.

Patel, who became the RBI chief in early September, is facing fires on multiple fronts. Even as the economy braces for the impact of the currency recall, expansion already slowed more-than-estimated last quarter.

The central bank has also had to resort to extraordinary measures to manage surging banking-system liquidity, and to make matters worse, the rupee sank to a record on Nov. 24 amid an emerging-market selloff triggered by the prospect of a U.S. rate increase this month.

“We would be looking at more clarity on how the liquidity will be managed,” Datar said.