On-hold US Fed paves way for RBI rate cuts

Friday, Sep 18, 2015,16:10 IST By metro vaartha A A A

New Delhi | The US Federal Reserve deciding to keep rates unchanged should provide RBI chief Raghuram Rajan headroom to cut rates by 25 bps later this month, experts say. According to global financial services majors like Bank of America Merrill Lynch (BofA-ML) and DBS, receding external risks pave the way for the Reserve Bank to cut the repo rate on September 29.
Domestic developments are favourable as well. We expect RBI Governor Rajan to cut 25 bps on September 29 and another 25 bps in February. After all, CPI inflation is well set on the RBI’s under-6 per cent mandate, BofA-ML said in a research note today. Retail as well as wholesale price based inflation dived to new lows in August on falling global commodity prices.
Consumer Price Index-based inflation, which RBI considers as benchmark, eased to 3.66 per cent in August from 3.69 per cent the previous month, while the one based on Wholesale Price Index tumbled for the 10th straight month to (-)4.95 per cent compared with a provisional (-)4.05 per cent in July. Receding external (event) risks pave the way for the Reserve Bank of India (RBI) to cut the Repo rate by 25 bps later this month.
Based on domestic developments, there is a sufficient case for rates to be lowered, DBS in a research report said. The DBS report further noted that structural tailwinds to the country’s recovery by way of crucial reforms are, however, on a slow lane, with progress on GST, land acquisition and labour reforms delayed at least until the winter parliamentary session in November/December.
These factors will see the central back maintain a prolonged pause beyond the 50 bps cuts expected by March 2016, DBS said. According to BofA-ML, the FOMC meeting not only failed to hike rates, but also delivered a relatively dovish message. BofA-ML pushed out its forecast of the first hike to December.
We expect capital flows to stall till December, given uncertainty around the Fed, about the turnaround in earnings and Bihar poll results on November 8, the BofA-ML report added. RBI, which has lowered the benchmark rate by a combined 75 basis points so far this year in three installments, is scheduled to hold its next bi-monthly monetary policy meet on September 29.

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