All Eyes On Raghuram Rajan. Big Rate Cut Possible, Say Analysts

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RBI Governor Raghuram Rajan is likely to cut key lending rate or repo rate by 25 basis points to 6.50 per cent at its monetary policy review on Tuesday, according to a Reuters poll of economists.  However, some economists don’t rule out the possibility of Dr Rajan surprising the Street with a bigger-than-expected cut of 50 basis points.

“An accommodative monetary policy is the need of the hour with industrial and agricultural data suggesting weakness,” said ZyFin chief economist Debopam Chaudhuri, who expects the RBI to go for a 50-basis-point cut.

Inflation cooled slightly to 5.18 per cent in February from January’s 5.69 per cent, breaking a five-month streak of gains and leaving room for the RBI to ease the key lending rate.

A day ahead of the Reserve Bank meet, Finance Minister Arun Jaitley pitched for an easier monetary policy, arguing that high interest rates can make the economy sluggish.  “The government has stuck to fiscal deficit commitments and inflation has been under control. Therefore, I do hope that this movement will continue in order to make our economy more competitive with more competitive interest rates,” the finance minister said.

Also, the government’s recent cut in small savings deposit rates will also help the RBI chief lower the policy rate, analysts said.

Market observers say that Indian equities are currently factoring in a 25-basis-point rate cut. A bigger-than-expected rate cut by Dr Rajan could trigger a rally in rate-sensitive stocks like banks, real estate and auto, they said.

Dr Rajan led an aggressive cycle of policy easing last year, slashing a cumulative 125 basis points off the repo rate to leave it at 6.75 per cent in September. Since then, however, the bank has chosen to wait.

The Reuters poll predicted a further 25-basis-point cut during the July-September quarter. “The RBI will want to wait for some clarity on the monsoon to ascertain the trajectory of food inflation before signalling another rate cut,” said Shivom Chakravarty, senior economist at HDFC Bank.

Monsoons have been unpredictable recently and 2015 marked a second year of drought in India.