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RBI unlikely to cut rates in its February 3 monetary policy review, shows poll

After leaving it at 8.0 per cent through 2014, the Reserve Bank of India is expected to cut 100 basis points over the next 18 months.

Deepti Govind | January 30, 2015 | Updated 17:27 IST
RBI unlikely to cut rates in Feb 3 policy review
(Photo: Reuters)

The Reserve Bank of India, having cut interest rates on January 15, is likely to keep them steady at its next monetary policy review on February 3, according to economists in a Reuters poll who said future moves could depend on the government's annual budget, due on February 28.

RBI Governor Raghuram Rajan , who is mandated to set policy independently, signalled after an unscheduled rate cut earlier in January that any further easing would depend on the government's commitment to rein in spending and implement reforms.

"The most important factor... Will be fiscal consolidation by the government, which will be a trigger for the RBI to initiate further rate cuts this year," said VK Vijayakumar, investment strategist at Geojit BNP.

A majority of the 46 forecasters in the survey expected the central bank to leave its benchmark repo rate unchanged at 7.75 per cent at its policy review on Tuesday.

But around a quarter of them said the bank could follow up January's rate cut with another 0.25 per cent point reduction to 7.50 per cent in order to support the domestic economy, which has struggled to recover from its slowest phase of growth since since the 1980s.

A bout of disinflation around the world has pushed major central banks - from Canada to Denmark to Singapore - to unexpectedly ease policy over the last month.

Even in the domestic economy, where controlling stubbornly high inflation has been one of the biggest challenges policymakers faced, price rises have cooled significantly in recent months as oil and commodity prices slumped.

Retail price inflation tumbled to 5 per cent in December, auguring well for the RBI's chances of achieving its target of 6 per cent by January 2016.

Still, rapidly cooling inflation is unlikely to prompt the RBI to slash key policy rates.

After leaving it at 8.0 per cent through 2014, the apex bank is expected to cut 100 basis points over the next 18 months.

When asked how much of an influence the budget would have on the Reserve Bank's next policy move on a scale of one to ten with ten being the highest, the median from 23 economists was seven.

Forecasters expect Finance Minister Arun Jaitley to set a deficit target of 3.8 per cent of gross domestic product (GDP) for the upcoming 2015-16 financial year, lower than the 4.1 per cent target in FY15.

Most respondents in the survey, 17 of 23, also said the key theme of Jaitley's budget would be boosting growth, the remaining chose fiscal consolidation. None said it would focus on populist measures.

A slim majority, 12 of 23, also said the government would meet the high expectations for economic reforms raised by Prime Minister Narendra Modi's election campaign.

They predict the government would announce cuts to spending on subsidies, increase levels of foreign investment allowed in the insurance and retail industries, and introduce a nationwide goods and services tax.

Markets have also priced in expectations for reforms and the benchmark Bombay Stock Exchange (BSE) index Sensex has regularly hit record highs since Modi took office in May.


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