Urjit Patel may go for 50 bps rate cut

The Reserve Bank of India (RBI) governor Urjit Patel may cut policy rates by 0.50% as concerns over a potential slowdown post the demonetization and resultant surplus liquidity in the banking system gives bigger room to cut lending rates, say economists.

The government believes that the fall in the cost of credit may spur many companies to make investments to expand the job market, which has been hit by the demonetization exercise.

Keki Mistry, vice chairman and CEO of Housing Development Finance Corporation (HDFC), told DNA Money, "The RBI may go in for a 0.50% cut in the repo rate to give an impetus to growth. The meeting of the US Federal Reserve and the likelihood of a rate hike may play on the governor's mind, but he may opt to support growth."

The temporary hike in cash reserve ratio (CRR), which was raised to a record 100% for a fortnight to neutralise the excess cash in the banking system, has sucked out Rs 3.2 lakh crore from the banking system. Experts say this might be reversed now, with the announcement of Rs 6 lakh crore in market stablisation scheme (bonds issued by the government to neutralise excess money in the banking system).

The demonetization exercise has so far got in Rs 11 lakh crore back to the banks as deposits.

The risks to growth following demonetization will be the prime focus of the Monetary Policy Committee, which will meet for two days on December 6 and 7.

India's economy expanded 7.3% in the July-September quarter from a year earlier. There are worries that it would slip by 1% in the coming quarters. Edelweiss Financial Services said in a report that near-term risks to both inflation and growth are tilted towards the downside, post demonetization.

"Thus, we think it makes sense to front-load the monetary easing to limit the downside from demonetization. We lean towards a 0.50% cut for the simple reason that even before demonetization we were seeing the rising possibility of 0.50% cut spread over the next 2-3 policy reviews, given that the RBI had lowered its assessment of neutral real rate and inflation was expected to be lower than RBI's indicative trajectory," the report said.

However, some economists say that the impact on the rupee and the strengthening dollar should also be considered. Abheek Barua, chief economist at HDFC Bank, said, "We are going with a 0.25% reduction in the repo rate cut for now as global factors like the possible rate hikes by the US Federal Reserve will all play on the monetary policy committee (MPC)."
It could also drag inflation down. At 4.2 % in October, it is below the central bank's early-2018 target of 5 %. Despite all this, some economists feel that RBI would still go with a 0.25% cut in the repo rate.

D K Srivastava, chief policy advisor, EY India, told DNA Money that the RBI would cut rates by 0.50% but it may come in parts as the central bank would like to pause and study the impact of the meeting of the US Federal Reserve before inflicting a sharper cut in rates.

Pranjul Bhandari, chief economist at HSBC, said in a report, "We were already expecting a rate cut in December on the back of moderating food prices. Growth concerns over the mix in pre-demonetization GDP growth prints, an output gap which will be negative for longer following demonetization, and lower inflation until then, makes us believe that some more space for easing will open up. We add an additional 0.25% rate cut for the February meeting. The risk to our view is that much of the growth drag turns out to be temporary, not requiring an additional rate cut. But until we see some data that suggests this, we hold on to two rate cuts."