The Reserve Bank of India is expected to go for only a 25 bps rate cut this year and the likelihood of an easing in April is more than in February, says a Citigroup report.
According to the global financial services major, the monetary easing support to rates is waning as the mantle is passed on to the fiscal policy.
“On balance, and given our baseline assumption of a deviation in fiscal deficit roadmap (from 3 per cent of GDP to 3.4 per cent of GDP in 2017-18), we expect MPC to cut policy rate by only 25 bps in 2017,” the report said.
It added that the rate cut would be more effective after the re-monetisation exercise is concluded fully and there is absolute clarity on the increase in lendable resources for banks.
“This makes the April rate cut, a tad more likely than the February rate cut,” it said.
On December 7, the central bank kept interest rate unchanged despite calls for lowering it and also lowered the economic growth projection by half a percentage point to 7.1 per cent in the first policy review post demonetisation.
The central bank will hold its next monetary policy meet on February 8.
Though the CPI inflation has stayed within RBI’s target range for over 2 years and the average CPI inflation has declined every year since 2012-13, reflationary risks are setting in as commodity prices rise and dollar strength continues, the report said.
Citigroup expects 2017-18 average inflation at 4.9 percent up from 4.6 percent in 2016-17.
Along with global factor like crude prices (crude price is likely to go up to USD 65/bbl by December 2017), domestic factors are also turning adverse like MSP and rural wages, the report added.