Monetary policy review: Know why RBI might go for 25 bps rate cut?

Acute cash shortage in India created by Prime Minister Narendra Modi demonetisation move on November 8, may force the central bank to slash interest rate to a six-year low in its bi-monthly monetary review on Wednesday. News Nation talked to head Research of Moneylicious Capital & Advisory Services Private Limited Avinnash Gorakssakar and discussed the why RBI would go for 25 bps rate cut on Wednesday monetary review.

Avinnash Gorakssakar  said that the monetary policy is going to be characterised by a host of new developments like having this policy after the recently announced Demonitisation which has led to sharp increase in deposits with banks coupled with the fact that Inflation is trending downwards which gives a fair chance of assuming that a rate cut of 25 bps looks possible.

4 reasons why RBI will go for a rate cut

1. To spur growth:  Second quarter GDP growth improved to 7.3% year-on-year from 7.1% in Q1, but the adverse economic impact from the demonetisation move will hit Q3 and Q4 GDP growth readings. The negative impact has been visible in the sharp decline in November manufacturing PMI to 52.3 from 54.4 in Oct and disruption in sales momentum evident in November auto sales numbers.  To ignite the growth engine currently impacted by demonetisation move, RBI may go for a rate cut.

2. CPI under RBI's comfort level: Avinnash Gorakshakar said that October CPI inflation eased to a 14-month low at 4.20 per cent  year-on-year from 4.39 per cent in September, mainly due to decline in consumer food price index, even as core CPI inched up to 4.92 per cent year-on-year from 4.86%, indicative of stickiness in underlying inflation. It simply corresponds that RBI will be able to achieve its March 2017 CPI target of 5%, even before factoring in the disinflationary impact of the demonetisation slowdown.

3. Global factor: An expected Fed rate hike in December has pushed the significant outflows from the Indian markets in November, with consequent impact on the weak rupee. To strengthen the tumbling rupee RBI may opt for rate cut today. 

4. Commodity prices:  Uncertainty hovering around the rise in crude prices (Brent at 16m high) post OPEC’s decision to cut production last week may force RBI to remain dovish on the rate cut. Avinnash said,  "There is a possibility that the prices may be capped at US$ 60 per barrel, given the threat of unconventional production picking up. Therefore, we expect a 25 bps cut in repo rate considering the fact that post demonetisation, near term risks to both inflation and growth are tilted towards the downside."