RBI Policy: Experts hold mixed views on outcome of Urjit Patel, MPC's first review

All eyes are on the the Reserve Bank of India, its new governor, Urjit Patel, and the newly-constituted Monetary Policy Committee as they gear up to announce the monetary policy review on October 4 which will be a historic day. This is not only because it will be Urjit Patel's maiden review as the new governor of the Reserve Bank of India (RBI), but also because it will be the first time that the monetary policy will be decided by the committee. Let's take a look on what experts are expecting out of the key policy review on Tuesday. 

Urjit Patel took over as the new RBI governor on September 4 as Raghuram Rajan stepped down after his three-year term came to an end on the same date. The new six-member Monitory Policy Committee constituted, has three members -- Urjit Patel, Micheal Patra (Executive Director) and R Gandhi (Deputy Governor-in charge of monetary policy) -- from the RBI and three members -- Chetan Ghate (professor at Indian Statistical Institute), Pami Dua (Director, Delhi School of Economics) and Ravindra Dholakia (Professor IIM-Ahmedabad) -- nominated by the government for a non-renewable period of four years. 

The interest rates will be set by the MPC in accordance with the government's 4% inflation target set in July, for the next five years, with a upper and lower margin of 2% each.

This policy assumes importance as it is the first by the new governor and the new committee, with speculation rife about how the key policy rates would move. 

In the October 4 policy announcement, economists and brokerages are largely expecting Patel and MPC to maintain status quo despite inflation easing sharply from 6.1% in July to 5% in August. Easing food prices supported the fall in consumer inflation. Instead, most of them are unanimous in their view that the RBI may go for a rate cut in December ahead of the the US Federal Reserve hiking its interest rates. 

Prajul Bhandari, chief economist at HSBC stated in a report that the recent fall in food prices has been sharper than expected, and cutting rates soon would give the RBI a cushion before the possible US Fed rate hikes. Bhandari stated that the agency expects a rate cut in December since inflation rate is anticipated to be well below 5%, which will give the RBI enough justification to implement the cut. 

HSBC said that, "The RBI has two objectives – to reach its 5% inflation target in early 2017 and keep real rates at the 1.5-2% range. Marrying the two would open up space for easing by 50 bps. We expect a 25 bps rate cut at both the December and February policy meetings."

Indian rating agency Crisil, in a recent research note, stated "RBI may choose to wait for some more time before wielding the knife as inflationary trends may accelerate going forward."

Kotak Securities is also eyeing a 25 bps cut albeit in December. The company stated, "We continue to see room for RBI to be more accommodative, with 25 bps cut in December and further scope if inflation surprises further on the downside along with comfortable liquidity position. We expect benchmark 10-year yield to ease towards 6.50-6.60% by end-FY17."

However, Edelweiss Research and EY India said that the said they expected the RBI to cut rates on Tuesday. 

Edelweiss says that a rate cut is possible because of inflation plummeting more-than-expected and the RBI gearing up ahead of the US Fed hike. "We foresee 25bps cut in repo rate in the forthcoming monetary policy review on October 04, 2016. Recall, that the RBI maintained status quo in August, citing rise in inflation and upside risks to 5% projection of March 2017. Since then, headline inflation has fallen sharply and more importantly, further disinflation is in store over next few months as pulses prices deflate." it said. 

"One may argue that the RBI would wait till December for further confirmation of disinflation trend, but we think the Monetary Policy Committee (MPC) will be uncomfortable cutting rates very close to a potential Fed rate hike." the company added. 

D K Srivastava, chief policy advisor at EY India, said, "We are expecting a 0.25% reduction in the repo rate as the food prices are falling and are expected to fall further as fresh food supplies are expected to flood the market which may further bring down inflation." 

Japanese brokerage Nomura also expects a 25 bps cut in the RBI's repo rate in December. The agency says this will be followed by an extended pause in 2017, given the upside risks to inflation and sticky underlying factors.