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RBI expected to cut rates by 25 bps to 7.25 pct on June 2
Highlights
The Reserve Bank of India is likely to cut its benchmark interest rate by 25 basis points to 7.25 percent when it meets early next week and make a similar move before December, according to the results of a Reuters poll.
The Reserve Bank of India is likely to cut its benchmark interest rate by 25 basis points to 7.25 percent when it meets early next week and make a similar move before December, according to the results of a Reuters poll.
That would put India on a different path to the United States, where the Federal Reserve is widely expected to begin tightening policy later this year. The RBI has taken the precaution of building up currency reserves in case markets turn volatile amid the impending divergence.
The survey found 38 of the 48 economists polled expected the RBI would cut the repo rate at the June 2 meeting, with 35 of those expecting a 25 basis points cut.
"Real interest rates remain very high now because of exceptionally low inflation. This gives justification for the RBI to undertake cuts" said Vishnu Varathan, senior economist at Mizuho Bank.
The RBI has already cut rates twice this year as inflation fell within its comfort zone but left them unchanged in April as it waited to assess inflationary pressures and to give banks more time to reflect the earlier cuts in their lending rates. Their reluctance to cut has been frustrating for RBI Governor Raghuram Rajan.
Happily for the RBI, low oil prices have helped India enter the monsoon season with inflation well below the 6 percent upper-end of the bank's target range, making it better placed to handle upward pressures in food prices if disappointing rains lead to poor crops.
Thanks to a change in statistical methodology, India's economic growth overtook China's in the October-December quarter. But data for the January-March quarter, due to be released on Friday, is expected to show weaknesses that make another rate cut later in the year highly likely.
Median forecasts from the poll showed another 25 basis point cut in the repo rate was likely between October and December.
Banks' cash reserve ratio - which has been at 4 percent since early 2013 - was expected to remain unchanged until at least June 2016, the end of the poll's forecast horizon.
REFORMING ROLE
While Prime Minister Narendra Modi's government has inspired optimism about reforms since sweeping to power a year ago, one of the main reasons why India's growth numbers look better was a statistical revamping of the GDP data series earlier this year.
Data due on Friday for the final quarter of last fiscal year is expected to show India's economy grew 7.3 percent, slightly slower than the 7.5 percent growth in the previous October/December quarter.
Growth for 2014/15 is expected at 7.4 percent, higher than 6.9 percent recorded for prior fiscal year.
Although the GDP growth figures look impressive, economists have noted a lack of investment, subdued growth in bank lending growth, weak capacity utilisation and potential weakness in consumption.
However, analysts are confident reforms, such as allowing more foreign investment in insurance and mining, would contribute significantly to growth this fiscal year.
When asked, 24 analysts said they were 'confident' and five 'very confident' reforms would bear fruit. Four said 'not confident' and only two said 'not confident at all'.
"As reforms continue and monetary conditions turn more accommodative, we expect economic activity to pick up," said Anurag Jha, economist at Citibank.
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