Reserve Bank will go for another round of rate cut in its December review, keeping in line with its dovish stance in the last policy, which might be followed by a pause in the medium term, according to foreign brokerage HSBC.
After the unanimous rate cut call in the MPC and going through minutes of the meeting, we feel the RBI will go for another 25 bps rate cut in the December review. However, we are not expecting for more cuts after December,” HSBC India Chief Economist Pranjul Bhandari said.
She said inflation-inducing factors like house rent allowances arising from the seventh pay commission awards, implementation of Goods and Services Tax and also a likely review of fiscal deficit targets will prevent the RBI from cutting rates further in the near to medium term.
At its maiden rate review, which was also the first review by Governor Urjit Patel, the six-member Monetary Policy Committee (MPC) surprised all by its unanimous rate cut call amid mixed expectations among analysts.
The commentary after the review, coupled with the minutes of MPC meeting released by RBI, has increased expectations of one more round of cut as inflation is expected to go down further but there are differing views on what stance it takes after that.
Bhandari said the rate stance after the December policy hinges a lot on RBI’s internal targets on inflation.
“The crucial question is whether RBI is keen to get all the way to 4 percent by March 2018 or is it fine as long as inflation is under 6 percent,” she said.
It can be noted that under Patel’s predecessor Raghuram Rajan, the RBI had said it would be targeting to get inflation down to 4 per cent by March 2018 through a medium-term glide path.
Bhandari said even though the RBI has got it down to 5 percent levels as of now, it is a “big task” to further reduce it to 4 percent.
She said to achieve the 4 per cent target, it is essential to work on factors beyond the successfully tamed food inflation and pointed out to price rise on the services front, especially health and education, which are difficult to control.
Both the services components, which constitute nearly 12 percent of the CPI basket, will require a lot of work from the government side as well, she said.
On growth, consideration for which led to the rate cut stance, Bhandari said it is largely “flat” primarily due to weak investment.
She said unlike the last two fiscals when it helped growth, there has been a decline in public investments which is hurting the overall GDP number, which in the first quarter slipped to 7.1 percent under the new GDP computation methodology.