Reserve Bank of India (RBI) Governor Raghuram Rajam is expected to slash key lending rates only once in the calendar year 2016 as hurdles, including rise in inflation, could curtail the scope for larger rate cuts, according to a global financial services firm.
RBI is expected to announce a 25-bps cut in repo rate at its second bi-monthly policy review meeting in April this year, Deutsche Bank said in a report.
“We expect a 25-bps rate cut in April, but in case the global economy tips into a recession, thereby delaying India’s growth recovery, and if inflation remains along the glide path as projected by the central bank, room could open up for further rate cuts in the second half of 2016,” it said.
A rise in retail inflation to 5.6% in December last year was “in line” with the market expectations, it said.
The firm expects the RBI to achieve its near-term inflation of 5.8% by early 2016, given a continued slump in commodity prices. Currently, crude oil prices trade below $30 a barrel, a level not seen in the past 12 years.
But the RBI’s target to bring down the inflation rate to below 5% by early 2017 is likely to be an “uphill task” due to impediments from the government fiscal stance, food supply and inflation in the services sector. The risks will probably make the RBI tread a cautious path in going for additional monetary easing.
“Consequently, we expect only one 25-bps rate cut in 2016 (early April), in our base case scenario,” Press Trust of India quoted Deutsche Bank as saying.
Last year, the RBI had cut rates by a total of 125 bps, helped by a sharp decline in inflation on the back of cuts in petrol and diesel prices.