RBI in wait and watch mode now, may cut rate by 25-75 bps in 2017

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NEW DELHI: The Reserve Bank of India (RBI) did the unexpected on Wednesday, but most experts called it a ‘brave & bold’ move by the central bank to deal with risinginflation and global uncertainty.

Most analysts expect RBI to cut policy rate by 25-75 bps in calendar year 2017.

In a surprise move on Wednesday, RBI decided to keep the repo rate unchanged at 6.25 per cent compared with market expectations of at least 25 bps cut. The Monetary PolicyCommittee (MPC) voted 6-0 in favour of keeping the repo rate unchanged.

RBI left the cash reserve ratio unchanged at 4 per cent, as expected, and announced that the incremental CRR of 100 per cent will stand withdrawn from December 10.

“It’s a superb move by RBI and MPC to not cut the repo rate. Questions were being raised over RBI’s independence and Patel’s silence on the demonetisation issue, but with this non-consensus move of holding rates steady, we believe RBI has made a big statement on its independence and objectivity,” said Murthy Nagarajan, Head of Fixed Income, Quantum Mutual Fund.

“This, however, does not rule out further rate cuts and if the impact of demonetisation does indeed lead to lower inflation and slower growth, then RBI will look to cut rates in its February policy review,” he said.

It looks like by February 2017, the central bank will have greater clarity on the global situation such as the quantum of rate hike by the US Fed as well as the impact of Trumponomics.

Tushar Pendharkar, Head of Research at Right Horizons Investment Advisory Services, told ETMarkets.com even though the central bank kept repo rates unchanged at 6.25 per cent, rate cuts of up to 75 bps are in the offing in 2017.

RBI’s decision to keep policy rate unchanged was an attempt to balance the impact of demonetisation. According to the central bank, demonetisation is expected to hurt growth and inflation only for a transitory period.

Moreover, as core inflation remains sticky, global crude oil prices rise and there are signs of increase in certain food prices, RBI thought it prudent to “wait and watch”. RBI also lowered the GVA forecast for FY17 to 7.1 per cent from 7.6 per cent earlier.

“Going forward we expect a rate cut of up to 50 bps over next 2-3 policy reviews to limit the downside risk due to demonetisation of higher denomination currencies and because of the positive impact on easing consumer inflation,” Rohit Gadia, Founder & CEO, CapitalVia Global Research, told ETMarkets.com.

“As inflation is likely to be under RBI’s projection, chances of the same are higher now. However, global dynamics and action of other major central banks globally can put a constraint on RBI,” he said.