Further Rate-Cut And Easing Of Regulatory Measures On The Cards

If all goes well, we can see a further cut in repo rate and easing of regulatory measures. The minutes of the February MPC meeting showed a convergence of opinions of all members, which is evidenced by a united stand on the need for easing rates to support growth, buoyed by the gradual improvement in the inflation outlook. Going forward, Emkay expects a shallow rate cut cycle, maybe another 25-50bps, along with the likelihood of easing of regulatory measures. The unanimous decision to cut repo rate by 25bps while maintaining a ‘neutral’ stance is a good augury, when taken under any yardstick. Every member spoke of the need to cut rates to support flagging growth, with inflation now becoming less of a concern. Every MPC member, both internal and external, stated that the lower inflation trajectory in the past few months as well as the comfortable outlook going ahead provide the MPC with elbow room for a rate cut to support growth. The growth-inflation balance has thus turned decisively negative for growth, in MPC’s opinion.

Prof. Singh has reiterated that food inflation is supply-driven, given the lack of significant effect on food prices through changes in the repo rate. The new Governor of Reserve Bank of India (RBI) Sanjay Malhotra also agreed that the lower inflation outlook indicates that a lower policy rate is appropriate and in the fitness of things. Most members also opined that January’s liquidity infusion measures are necessary to embark on rate cuts. Some members did caution about the risk of currency depreciation following a rate cut, in the context of the sharp fall in currency in January. However, most members were sanguine here. Dr. Ranjan was more forceful, while stating that interest rates of a currency during periods of outflows that do not differentiate across countries could be counter-productive. He also said that India attracts capital flows due to its growth outperformance, and not because of interest rate differentials; and so it is imperative to preserve the high growth momentum in the medium term.

It does seem as though the RBI has now loosened its reins to some extent on FX under Sanjay Malhotra. Prof. Singh pointed to the risk of higher outflows due to lower interest rate differentials, but cited recent trends to suggest that this is a low-probability scenario, while maintaining that with DMs having recently cut rates provides room to cut rates. The commencement of the rate cut cycle in February was on expected lines, and the minutes show how there was broad convergence among members, especially across the most pressing issues. However, analysts only expect a shallow rate cut cycle of 25-50bps with more liquidity easing measures also being a possible move, going forward. Thus, one can hope that the central bank may go for a further 25bps repo rate cut next month to six per cent for the simple reason that growth concerns weigh on their minds.