Expect at least 25 bps rate cut this week

The Reserve Bank of India (RBI) is expected to cut repo rate – the rate at which it lends overnight money to banks – by 0.25% on August 2, 2017.

The central bank, market participants said, is going to be encouraged by the low inflation, steady and low oil prices that have reduced the fears of imported inflation and rate hikes by the US Federal Reserve being slower than anticipated.

Retail inflation hit a historically low level of 1.54% in June on fall in prices of food items such as vegetables, pulses and milk products. Core inflation has slipped to a record low of 3.73%, down from 4.13% in May.

Venkat Nageswar, deputy managing director - global markets, State Bank of India (SBI), told DNA Money, "A 0.25% rate cut is factored in because inflation is pretty low, much below the RBI target of 4% for 2018. The monsoon has been good and imported inflation has come down and the rate hike in the US might not happen in a hurry."

But the worry about growth may be uppermost on RBI's mind. The Index of Industrial Production (IIP) was at 1.7% in May compared to 2.8% in April. Sector-wise, manufacturing and electricity grew 1.2% and 8.7%, respectively while mining contracted 0.9%. Most of the uptick in manufacturing growth was helped by pharma products (24.5%), other manufacturing (24.4%) and other transport equipment (11.8%) while 16.5% contraction in beverages segment acted as a drag on manufacturing sector's growth.

Jayesh Mehta, managing director and country treasurer, Bank of America Merrill Lynch, said, "We expect a 0.25% cut in the repo rate cut, with low inflation providing a comfort. Stable global commodity prices, especially of oil, will be factors that will push RBI for a rate cut to beef up growth. "

But attracting private investment and a bank credit-led growth is beyond the control of RBI. Lending rates are already low with a range of 9% to 10.25% for most loans. NPA resolutions now have to be faster so the bank balance-sheets are stronger.

Morgan Stanley said in a report, "RBI is to signal a one-and-done rate cut at the August 2 meeting. Growth is already on a recovery path and the key issue at this stage in the cycle is to revive private investment, in which monetary policy has arguably a limited role to play. Rather, in our view, the actions to resolve the banking system's non-performing loan issue will be more critical to revive private investment. Moreover, considering that global central banks are likely to remove monetary accommodation in the coming months, it will also limit the scope for further monetary easing."

"While CPI inflation has likely troughed in June, the rebound in CPI inflation in the coming months is likely to be weaker than we initially expected. We now expect CPI headline to end the year at 3.8%; hence providing RBI with the room to cut rates once more in the August meeting," Morgan Stanley said in the report.

The CPI which tracks the food prices have been erratic. The food index moved up sharply by 1.3% in June sequentially primarily led by vegetables (6.1%), meat and fish (2.7%) and eggs (1.5%). The price of pulses continued to contract sequentially.

Kotak Securities said in a report, "Inflation comfort to prompt a rate cut. Retail inflation continued to slide led by sustained weakness in core inflation, even as food prices begin to inch higher. A sub-2% reading further undershoots RBI's revised 1HFY18 inflation trajectory. This along with weak growth provides scope for 0.25% of rate cut at the August meeting. However, the scope for further monetary accommodation remains limited as food prices and rural real wages pick up and global dynamics turn unfavourable."

...& ANALYSIS

• Monsoon has been good, imported inflation has come down and Fed rate hike may not happen, say experts
   
• Stable global commodity prices will push RBI for a rate cut to beef up growth, they say