RBI expected to cut repo rate by 0.25 per cent in policy review meeting: ICRA

Reserve Bank is expected to cut down the repo rate by 0.25 per cent at its policy review on Wednesday, followed by an extended pause, ICRA said.

The rate cut would be supported by the modest CPI inflation, which is expected to undershoot the March 2017 target set by Reserve Bank of India (RBI) and the continued fiscal consolidation attempted in the Union Budget for FY2018, the rating agency said.

"There is a high likelihood of a 25 bps cut in the repo rate in the upcoming policy review in February 2017. The CPI inflation in the ongoing quarter is expected to remain below the forecast of 5 per cent.

"Moreover, the Union Budget for FY2018 has balanced fiscal consolidation with increased capital spending, which would revive growth in a non-inflationary manner," Naresh Takkar, Managing Director and Group CEO, ICRA, said.

Besides, with limited evidence so far that the rebound in Q4 FY2017 would be strong, ICRA expects the monetary policy committee to pare its baseline gross value added (GVA) growth forecast for FY2017 downward from 7.1 per cent, and indicate a modest improvement in FY2018.

ICRA's own baseline estimates forecast a pickup in GVA growth from 6.6 per cent in FY2017 to 7 per cent in FY2018.

ICRA expects the CPI inflation to undershoot the RBI' projection of 5 per cent for Q4 FY2017.

The limited space for further monetary easing by the RBI, the mild rise in the net long-term borrowings of the Government of India, and an anticipated uptick in state governments' market borrowings in FY 2018, suggest that Indian bond yields are unlikely to ease significantly below current levels, the rating agency said.

With greater emphasis being laid on bringing inflation in a durable manner to 4 per cent, i.e. the mid-point of the CPI inflation band of 2-6 per cent, the anticipated rate cut in February 2017 is likely to be followed by an extended pause.

The CPI inflation target set by the RBI's Monetary Policy Committee (MPC) for March 2018 is awaited.

Following the surge in deposits and liquidity after the note ban, banks had cut both deposit and lending rates. With the easing of limits on withdrawals, bank deposit growth on a YoY basis has eased from 15.9 per cent on November 25, 2016 to 13.9 per cent on January 20, 2017; ICRA expects deposit growth to ease further to 12 per cent by end-March 2017.