RBI likely to reduce rate by 25 bps on Mar 19, says HSBC

Foreign brokerage HSBC today said the Reserve Bank will cut the policy rate by 0.25 per cent on Tuesday as the central bank is likely to boost growth amid some comfort on the inflation outlook front.

The central bank may further reduce repo rate by 25 bps on Tuesday and make another equal cut in the second quarter of 2013, taking the policy rate to 7.25 per cent from the current 7.75 per cent, HSBC said in a report today.

"While growth is stabilising, the RBI is likely to see it as too low for comfort. At the same time it is getting slightly more comfortable with inflation outlook. Coupling this with the government's delivery of a relatively credible budget targeting further consolidation, this is likely to encourage RBI to cut policy rates by 25 bps again next week.

Another is likely to follow in Q2, but that may be the end of the easing cycle," the report said.

However, positive IIP numbers and a disappointing retail inflation numbers at 10.9 per cent yesterday tempered hopes of a rate cut in the broader markets -- equities and bonds.

A Nomura report has said the brokerage expects the Reserve Bank to deliver next repo rate cut on May 3, not March 19.

According to HSBC, the central bank is likely to justify the rate cut with the easing in core inflation and the expectation that inflation will decline further during 2013.

It also said the apex bank is also likely to partly base its decision on the government's efforts to deliver fiscal consolidation as exemplified by the progress in FY'13 and presented in the Budget for FY'14.

The report said that RBI, however, is likely to communicate that further rate cuts were conditional on easing of inflation pressure along with initiatives for structural policy reforms and fiscal consolidation.

"This communication is important to help anchor inflation expectations, keep the government on its toes, and help safeguard the RBI's credibility," it said.

Credit Suisse Director Robert Prior-Wandesforde yesterday had said he expected the monetary authority to slash the repo or short-term lending rate on Tuesday.

Barclays India had also said a 25 bps cut in the repo rate was in the offing. "We expect 25 bps repo rate cut next week, as the seemingly better IIP print does not weaken the case for a March easing by the RBI," Barclays India Director and Chief Economist Siddhartha Sanyal said in a note.


Source: Economictimes