RBI Repo rate cuts unlikely in FY15: ICRA

MUMBAI (Topmcxtips.com): Rating agency ICRA expects the RBI to refrain from premature monetary easing in a bid to support growth, despite the lag associated with policy transmission.

With continuing excess capacities in a number of sectors, a cut in interest rates in unlikely to spur a revival in the capex cycle in the near term. Moreover, a fall in interest rates is unlikely to revive projects that are stuck on account of issues related to land acquisition, availability of feedstock, clearances etc., ICRA said.

A concerted effort by the Central and State Governments to remove such impediments is likely to produce a more durable revival in growth than an early rate cut by the RBI, ICRA added.

Benefiting from a favorable base effect, CPI inflation moderated to 5.5% in October 2014, below the medium term objective of 6.0% as per the glide path announced by the Reserve Bank of India (RBI). Although CPI inflation in January 2015 is expected to be well below the initial target of 8.0%, it is expected to print at a considerable 7.0% in February-March 2015.

“With the RBI having indicated that it would look through such base effects, we expect a low likelihood of Repo rate cuts in the next two policy meetings.”

A firm anti-inflationary stance over the remainder of FY15 would help to rein in expectations as the economy adjusts towards the medium term inflation target of CPI inflation at 4+/-2%.

“We expect the Central Bank to embark on a rate easing cycle in Q1FY16, with Repo rate cuts of upto 50 bps, if the monsoon forecast for 2015 is normal, crude oil prices average sub-USD 95/barrel and exchange rate volatility remains contained.”

In recent months, the Narendra Modi-led Government made several announcements that would boost domestic production (Make in India, defence project approvals, early coal block auctions) and improve ease of doing business (simplification in labour compliance, launching of online clearances for environmental and forest approvals).

However, these are likely to impact growth with a lag. In ICRA’s view, a number of additional measures need to be introduced to ensure an early pickup in growth.

While the delayed kharif harvest has slowed the pace of rabi sowing in 2014-15 relative to 2013-14, ICRA expect the same to catch up subsequently. Nevertheless, current rainfall trends do not augur well for a substantial improvement in agricultural growth in Q4 FY15.

On balance, agricultural growth in 2014-15 is expected to remain below 1.5%, which in conjunction with modest rise in MSP is expected to keep rural consumer sentiment in check, ICRA said.