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Will RBI cut rates or hold them on February 8?

In its last monetary policy outing, the first since demonetization, the RBI had maintained status quo on key policy rates.

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RBI Governor Urjit Patel
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The Reserve Bank of India (RBI) is slated to announce its last bi-monthly policy for the current fiscal on Wednesday.

After its last outing where the central bank - advised by the Monetary Policy Commitee on key interest rates - left the repo rates unchanged despite desperate calls from the post-demonetized economy, economists, agencies and bankers are expecting a rate cut to boost consumption. 

Post demonetization, consumption and investment took a hit, bringing retail inflation down to a three-year low of 3.41%. This frees up some headroom for the RBI to effect a rate cut to the extent of 25 bps, they said. 

ICRA said that a rate cut of 0.25% would be supported by the modest CPI inflation which is expected to undershoot the March 2017 target set by the RBI and the continued fiscal consolidation attempted in the Union Budget FY2018.

Finance Minister Arun Jaitley while achieving fiscal deficit target of 3.5% set by the government the fiscal, said that for the next financial year, fiscal deficit target would be set at 3.2% of GDP. This is despite the fact that the government had to hike its spending to boost consumption once again. 

"There is a high likelihood of a 25 bps cut in the repo rate in the upcoming policy review in February 2017. The Union Budget for FY2018 has balanced fiscal consolidation with increased capital spending, which would revive growth in a non-inflationary manner," Naresh Takkar, Managing Director and Group CEO, ICRA, said.

Analysts at DBS Bank and HSBC also agree on a 25bps rate cut on February 8th, but said it will be a "close call" for the Monetary Policy Committee.

DBS said one should not expect aggressive rate cuts by central bank from here on, and the recent uptick in purchasing managers views make the upcoming review a "close call" for the central bank.

"While it's a close call, we expect the RBI to deliver a 0.25 per cent repo rate cut at the February 8 policy meeting on the back of low inflation and a negative output gap," HSBC India chief economist Pranjul Bhandari said in a note.

"It is clear that the central bank is nearing the end of the monetary easing cycle as pent-up demand and easing cash shortage lift growth next year," DBS said, pointing out to oil prices and high rates in the US as a risk.

In an earlier DNA article, State Bank of India chief Arundhati Bhattacharya told us, ""SBI is now ahead of the cycle. We have cut rates by 2% as compared to the 1.75% cut by RBI. So a repo rate cut is expected." At the same time, the economic research department of the state-run bank said that RBI would continue its status quo. 

Axis Bank economist, Sougata Bhattacharya also said he expected a pause in the monetary policy stance of the central bank on Wednesdsay. "RBI will want to see the trajectory of the oil prices and food prices in the coming months."

Standard Chartered Bank financial markets head Ananth Narayan also said he expected the central bank to ease rates by 25bps. 

Industry body Ficci's views were in line with SBI's research arm, saying that it expected the RBI to maintain status quo and cut rates in the first half of the next fiscal. 

(With inputs from agencies)

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