The Reserve Bank of India’s (RBI’s) 50 basis points (half a percentage point) cut in repo rate surprised everyone.
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In the meantime, Rajan said that focus now will shift to ensuring that the cuts are passed on by the banks.
“Crucially, investors’ expectations of a further policy room for accommodation will be shaped by RBI’s assessment and further guidance, if any”, the Fitch Group Company said.
Some economists expect that Rajan, too, will lower growth projection for FY16 from 7.6% to 7.4%.
An interest rate cut had been widely expected after India reported consumer inflation had fallen to a record low of 3.66 percent in August, and there have been calls from within government and industry for the RBI to lower borrowing costs.
“The disinflation has been broad-based and inflation excluding food and fuel has also come off its recent peak in June”, they noted.
“The markets are eagerly awaiting the RBI policy, with the general consensus being 25 bps repo rate cut”, Devendra Nevgi, chief executive of ZyFin Advisors, told IANS.
Both Bhandari and Prassan expect the governor to lower the inflation target for January 2017. (The move could pave the way for a relook at the system of base rates – the floor lending rate for banks – and the way it is calculated and more liquidity for rate signals to flow freely).
“Since pressures on inflation and growth exist on both sides, and the RBI has lent a helping hand to growth through 2015, the central bank may be well placed to shift to a balanced stance at this juncture”, she wrote.
But with a poor monsoon just over, the coming months could see prices jump again as the effects of a poor harvest kick in, wiping out the gains of a positive base effect of the past couple of months.
But analysts at Societe Generale said that easing inflation – not politics – made this rate cut possible.
Even Finance Minister Arun Jaitley last week asserted that common sense says the interest rates should come down.
Markets are factoring in a rate cut from the Reserve Bank of India, the fourth time this year, as it meets on Tuesday.
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It was the most aggressive of the RBI’s rate reductions, following three previous cuts of 0.25%, and reflected growing concern that the country’s economic recovery was running out of steam.
