Raghuram Rajan to wait until April to cut rates again — Reuters poll

BENGALURU: The Reserve Bank of India ( RBI) will wait a month to cut interest rates again, according to economists in a Reuters poll who mostly said New Delhi’s latest fiscal deficit target looked optimistic.

Finance Minister Arun Jaitley committed to fiscal discipline in his February 29 budget, lowering the deficit target further for the fiscal year that starts next month, but offered little in the way of reforms investors have been waiting for.

Investors and traders in financial markets have been hoping RBI Governor Raghuram Rajan will follow soon with a rate cut, like he did last year.

But the majority of economists polled said he would not repeat the surprise cut of 25 basis points he delivered just a few days after last year’s budget, with 20 of 28 saying a cut was unlikely before next month’s policy review on April 5.

“Although we doubt the fiscal math, the fact that the government has been sticking to the stated math, in whatever way they are doing it, creates room for Rajan to cut rates soon,” said Kunal Kundu, India economist at Societe Generale.

“They will probably bring the fiscal deficit down in a way that is not desirable, by cutting public capex, but Rajan has indicated that even if fiscal consolidation leads to lower growth he would still be OK with it,” he said.

Asked what they thought about the fiscal deficit target for the next fiscal year, nearly two-thirds of the economists said Jaitley was being optimistic. The rest felt it was about right.

About two-thirds, 17 of 25, also predict the RBI will cut its benchmark repo rate by 25 basis points to 6.5 per cent next month. Two predicted a deeper 50 basis point cut to 6.25 per cent, while six saw no change.

After an April cut, the RBI is set to ease policy again in the last quarter of the year, according to the consensus view.

That is a very different outlook from what happened last year, when the RBI sliced 125 basis points off rates, twice unexpectedly and in-between meetings.

Last year’s rate cuts came as inflation cooled rapidly around the world, triggering a wave of similar easier policy from major central banks. Consumer price inflation in India was 5.7 per cent in January.

That exceeds Rajan’s inflation target of 5 per cent set for March 2017. Coupled with a weakening rupee, predicted to fall to record lows in the coming 12 months, rising inflation could stall the RBI’s easing cycle. — Reuters