Deutsche Bank sees 50 bps cut in RBI policy in Q1

German lender Deutsche Bank expects the Reserve Bank of India (RBI) to cut rates by 50 basis points (bps) till June as it will otherwise lead to further imbalance on fiscal and current account fronts.

"The Reserve Bank could cut rates by 25 percentage points each in April and June, if fuel price increase decision is pushed all the way out to late June like last year," the bank said in its report on monetary policy in Asia.

"The Reserve Bank has been keen to cut rates since the January policy meeting, but with both global and local economic indicators bottoming out and inflation not easing sufficiently, its room for cutting rates has arguably shrunk."

The report warned if the apex bank is unable to cut rates, it can pose a risk to the economy.

"The risk of RBI not being able to cut rates would stem from a further surge in global oil prices from current levels... A renewed bout of food inflation, and deterioration of fiscal and current account balances in the absence of any substantive reforms."

Deutsche Bank expects two more rounds of rate cuts during the second half of the calendar year.

"We are still calling for two more rate cuts in the second half of this calendar. We see RBI cutting rates by 1% this calendar year, although the window of opportunity for these cuts is narrowing as the government contemplates fuel price hike."

The RBI left all key policy rates unchanged during the March 16 review of the third quarter policy, citing persistence of inflation risks due to rising global crude oil prices, a weak fiscal position and a vulnerable exchange rate.

Headline inflation was 6.95% in February.

"The saving grace is that core inflation is waning and inflation momentum has declined in recent months. The decline in core inflation can be seen as reflecting that demand pressure in the economy is weak," the report said.

Noting that investment activity has gone for a toss, it said: "Investment activities remain anemic and some support is warranted to revive capital expenditures."

Source: Business Standard