RBI to jump on easing train soon

RBI's decision is 'correct': Pro
RBI's decision is 'correct': Pro   

The Reserve Bank of India (RBI) stood pat on monetary policy Tuesday, ignoring growing clamor for a rate cut in the face of lackluster growth and easing inflation.

The central bank held the repo rate at 8 percent at its policy review, largely in line with expectations, as it continues to monitor inflation developments in Asia's third largest economy.

A change in the monetary policy stance is "premature" at the current juncture, the RBI said, but added that it could alter its stance early next year if inflation continues to ease.

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"We interpret these statements to signal that the decision to lower rates will be data-dependent given the uncertainty over the trajectory for crude prices and challenging fiscal outlook," said Radhika Rao, economist at DBS.

"Nonetheless, the door for rate cuts has been left open," she said.

Raghuram Rajan, The Reserve Bank of India (RBI) Governor.
Danish Siddiqui | Reuters
Raghuram Rajan, The Reserve Bank of India (RBI) Governor.

Shilan Shah, India economist at Capital Economics agrees the central bank has laid the foundation for a rate cut in through its statement, which had a dovish tilt.

On the outlook for economic growth, the RBI noted that domestic "activity is likely to be muted" in the current quarter, due to weak agriculture production and rural consumption domestic demand.

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Furthermore, the central bank turned more dovish on its inflation outlook, lowering its inflation target to 6 percent from 8 percent for March 2015.

Consumer price inflation, which the RBI tracks in setting lending rates, eased to 5.52 percent in October from 6.46 percent a month earlier, helped by slower rises in food and fuel prices.

How soon?

The window for rate cuts will open in the first quarter of 2015, said Andrew Holland, CEO, Ambit Investment Advisory, applauding Rajan's decision to withstand pressure and keep rates on hold this time around.

Keeping the fight against inflation at the fore is important, said Holland, as easing too quickly would send the wrong signal to markets.

"Whilst businesses love to see lower interest rates, it's not really going to move the needle in terms of profitability," Holland said.

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Reform momentum will have a much bigger impact on corporate profitability than an interest rate cut at this moment, he noted.

"As inflation comes under control the opportunity for the RBI to reduce rates quicker will start to unfold in 2015," Holland said, predicting a rate reduction of 50 basis points in the first quarter of 2015.

The repo rate has been unchanged since January, when the RBI increased it by a quarter percentage point.