RBI may make rate cut move this week

Observers believe govt has done its part by keeping to the fiscal road map, while allocating more funds for infra and the rural economy

With the government sticking to its promised fiscal deficit path, expectation is building up that the Reserve Bank of India would reciprocate with a rate cut, even as early as this week, instead of waiting for its scheduled review of monetary policy on April 5.

The central bank had lowered its policy rate, the repo, a day after last year’s Budget.

And, RBI has paused on a change in rates at the previous two reviews, awaiting the Budget math.

In calendar year 2015, RBI cut its policy rate by a total of 125 basis points to 6.75 per cent. Most analysts expect RBI to cut a further 50 bps this year.

A basis point is a hundredth of a percentage point.

“Structural reforms in the Union Budget that boost growth while controlling spending will create more space for monetary policy to support growth,” RBI had said at its earlier review on February 2.

Finance Minister Arun Jaitley managed to keep the fiscal deficit within the 3.5 per cent of gross domestic product limit, as envisaged by the Fiscal Responsibility and Budgetary Management Act.

While also giving more for infrastructure and rural demand revival.

Kotak Mahindra Bank economist Upasna Bharadwaj said the government had not compromised on capital expenditure and there is all likelihood that implementation of the pay commission recommendations would be staggered.

"If RBI has to react to the Budget, it would be in a week, as there is no point in waiting longer,” she said.

RBI deputy governor S S Mundra on Tuesday termed the Budget as ‘pragmatic’, commeding the effort to maintain the fiscal consolidation road map with a thrust on the rural economy and job creation.

However, he refused to comment on a rate cut possibility, despite the borrowing numbers remaining contained at less than the expected Rs 6 lakh crore.

However, analysts have started talking about at least a 25 bps cut immediately.

“We now expect 50 bps of policy rate cuts in CY2016 (from 25 bps), as the Budget should give RBI sufficient space,” said a UBS report.

“With the government adhering to its promise, we expect the Reserve Bank to reduce the repo rate at its April 5 policy meeting, if not sooner.

An inter-meeting cut cannot be ruled out,” said Standard Chartered Bank.

Expecting RBI to cut soon, the markets rallied on Tuesday. The Sensex rose 777.35 points or 3.4 per cent to 23,779.35 points.

The rupee rose 0.9 per cent to close at 67.87 a dollar, from 68.42 on Friday. The yield on the 10-year bond, which had fallen 15 bps after the Budget, fell two bps more to close at 7.6 per cent.

Rupa Rege Nitsure, group economist at L&T Capital Finance, said a cut was a real possibility.

“There will be not much of an opportunity left for them if they wait beyond April, as the base effect for inflation will turn unfavourable.

"The Budget on paper has increased the 'feel good factor' and if RBI cuts rates, it would be perceived as a growth-positive for foreign investors.

"The resultant inflow can help RBI shore up its reserves further,” she said.

The only factor left for RBI to consider is the monsoon but Axis Bank chief economist Saugata Bhattacharya said that would be waiting for too long.

“When the rest of the conditions have been met, there’s no point for RBI to wait for the monsoon, too.

"The fiscal space is not being subsumed by budgetary profligacy and, as such, RBI has not much of reason to complain and can be expected to move now,” he said.

Expecting RBI to cut soon, the markets rallied on Tuesday.

The Sensex rose 777.35 points or 3.4 per cent to 23,779.35 points.

The rupee rose 0.9 per cent to close at 67.87 a dollar, from 68.42 on Friday.

The yield on the 10-year bond, which had fallen 15 bps after the Budget, fell two bps more to close at 7.6 per cent.

• Union Budget 2016: Complete Coverage