Analysts expect 25-bps rate cut from Urjit-led MPC

Global uncertainties will restrain the Reserve Bank to announce only a 0.25 per cent reduction in policy rates on Tuesday but there could be more loosening in the future, analysts said.

A majority of analysts and bankers are expecting RBI Governor Urjit Patel-led Monetary Policy Committee (MPC) to cut rates by 0.25 per cent on Wednesday, with some expecting a 0.50 per cent reduction.

“Even as inflation remains in a comfortable territory of around 4 per cent (March-end forecast of 4.6 per cent), the RBI could hold back on cutting the policy rate by a considerable margin,” HDFC Bank said in a note.

The rate cut will help revive private investments and can act as a counter to the demonetisation drive, which is slated to impact growth in the short-term.

It said global factors like the Fed rate stance and its impact on global bond yields, currency impact because of political situation in Eurozone and commodity prices following the OPEC decision to cut production will restrict the central bank.

The report, however, feels that if all the worries are taken care of, the Monetary Policy Committee (MPC) may cut rates at the February review.

Foreign brokerage Bank of America Merrill Lynch (BofA-ML) echoed this view of a rate cut tomorrow, but said the RBI will wait till April 2017 for delivering the next cut.

“We expect the RBI to cut policy rates by 0.25 per cent tomorrow to combat the on-going demonetisation shock with November inflation tracking at 4 per cent,” it said in a note.

Cutting its GDP growth forecast to 6.9 per cent from the earlier 7.7 per cent, BofA-ML said the disruption to economic activity caused by demonetisation will be 0.3-0.5 per cent of GDP every month, and how long the ‘remonetisation’ takes is the crucial question.

“How long will remonetisation take? We assume some normalisation in January,” it said, conceding that the exercise is “daunting”.