The Reserve Bank of India (RBI) announced a surprise 25 basis points (bps) cut in the benchmark lending rate to 6.25 per cent Thursday, a move that will be welcomed by the poll-bound Modi government.
"Consequently, the reverse repo rate under the LAF stands adjusted to 6.0 per cent, and the marginal standing facility (MSF) rate and the Bank Rate to 6.5 per cent". Most respondents had expected the central bank to only change the stance, to neutral from "calibrated tightening".
Another brokerage firm, HSBC also expects one more 25 bps rate cut in April, taking repo rate to 6 percent. It was the first policy review by the RBI after appointment of its governor Shaktikanta Das in December past year. According to Acharya, the outlook for prices had changed in December itself following a crash in oil prices, but the central bank did not change the stance, choosing to move in small steps.
India's new RBI governor Shaktikanta Das "has delivered what the Modi government was hoping for", said Mark Williams, chief Asia economist of Capital Economics, in a note.
He sees upside risks to inflation, which may prevent the central bank to cut rates this time around.
"In the 12-month horizon, if we see that inflation remains at 3.9 or maximum of 4 percent or below, then I think there is a room to act", Das told reporters after Thursday's decision.
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Das also downplayed the risk of inflation rising due to the forecast of fiscal slippage in last week's budget, and said the MPC will only look at the headline inflation number and ignore core inflation that has proven sticky.
"Pronab Sen, former principal adviser of Planning Commission, also believes there is a compelling case for a rate cut now".
Speculations were there that the six-member MPC, headed by RBI Governor Shaktikanta Das, will announce repo rate cut to ease pressure on banks. However, inflation dropping to a 18-month low of 2.19% in December appears to have prompted the MPC to go in for a cut.
The Central Statistics Office (CSO) in the data released had pegged the growth rates of agricultural, forestry, fishing and mining industry at 5%, of manufacturing, electricity, gas, water supply and other utility services at 6% and the services sector at 8.1% as against the growth estimates of 6.8%, 7.5% and 8.4% of the respective sector.