No rate cut on Dec 1, RBI done with it at least till Budget

By Chiranjivi Chakraborty , ECONOMICTIMES.COM | 29 Nov, 2015, 02.01PM IST

In its last policy review, RBI surprised markets with a 50 bps rate cut, raising the cumulative rate cuts for the calendar year to 125 basis points.

NEW DELHI: The Reserve Bank of India's rate-setting meeting on December 1 will most likely be a non-event from a rate cut perspective, as the central bank is unlikely to tweak the rates ahead of the crucial US Fed policy review mid-December.

In its last policy review, RBI pleasantly surprised markets with a 50 basis points (bps) rate cut, raising the cumulative rate cuts for the calendar year to 125 basis points.

The central bank has lowered policy rates from 8 per cent in January to 6.25 per cent this September in a move that has given the market the much-needed lift at a time when global jitters and domestic sluggishness in terms of poor corporate earnings and roadblock to reforms have continued to disappoint investors.

"As of now, the chances of anything happening in the remaining period of this financial year are pretty low. We believe RBI will continue to maintain status quo on policy rates. There may be some regulatory tweaking here and there, but the chances of further monetary easing in this financial year are very limited," said Devendra Pant, India Ratings.

Dhananjay Sinha of Emkay Global Financial Services expects the apex bank to remain unmoved on policy rate this time around due to the forthcoming meeting of the US Federal Reserve in mid-December and due to domestic factors. "I would assume that RBI has actually frontloaded rate cuts already and expect it to actually keep the rates unchanged in the coming months - both from a domestic standpoint and also keeping in mind the possibility that the US Fed could actually start raising rates."

Sanjay Shah, Head of Fixed Income at HSBC Global Asset Management, feels RBI may want to play the wait and watch game this time around. "In the next four or five months, they would also look at oil prices, commodity movements and so on. I think a call on rate cut will be taken perhaps closer to the budget, maybe immediately after the budget next year," he said.

Headline CPI inflation saw an uptick in October to 5 per cent, which was a four-month high. It was 4.41 per cent in September.

Rabi crop output has been lower than expected and prices of pulses have been rising, which are bound to put pressure on food inflation. However, the inflation number still remains below RBI's January 2016 target of 6 per cent.

In addition to that RBI will keep an eye on the government's fiscal health. The government is likely to accept the recommendation of the recently submitted Seventh Pay Commission report, which proposes a 23.55 per cent hike in gross salary, allowances and pension of 4.8 million staffers and 5.5 million pensioners.

The government's total outlay for paying salaries to its staff will rise by Rs 1.02 lakh crore, which, if accepted in totality, is bound to put pressure on its balance sheet.

"We do expect more rate cuts in India. We are expecting about 50 bps of cuts next year, but that is probably going to be after the budget when RBI get more comfortable with the idea of fiscal consolidation being there in place and that decline in inflation has been sustained over the course of six to nine months," said Rahul Bajoria, Regional Economist, Barclays.

"We are looking for 50 bps rate cuts in the second quarter of next year, that is April-June. It could be frontloaded, but for that, you have to see much lower inflation than what RBI is currently forecasting," he said.

Dhananjay Sinha said if the investment cycle revives in the near term, then there is a probability that there could be hardening of rates instead of easing. "Going forward, a rate cut will depend on how strongly the domestic revival happens and whether the investment cycle revives or not. If the investment cycle does not revive, then interest rates will fall further. But if investment demand picks up, then you might actually see rates hardening rather than easing."