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Mixed expectation from analysts on rate cut

Barely a year in office and Reserve Bank of India governor Dr Raghuram Rajan has won the ‘Governor of the year’ award from London-based financial journal Central Banking.

Commenting on the award, a modest Dr Rajan said the award is a recognition of the part the RBI and its staff have been playing in bringing macroeconomic stability to the Indian economy, in creating more competition and new growth opportunities in the banking and financial markets, as well as in expanding financial inclusion.

For Dr Rajan, the period since he has been governor has been a fire fighting one. He had his job cut out for controlling the volatile rupee, bringing down inflation and providing macroeconomic stability to the Indian economy. With green shoots of growth seen in the economy and inflation being tamed to a large extent, the governor is now under pressure to shift his focus to pushing growth.

The recent data print shows that December CPI inflation rose to 5% from 4.4% in November, but this was slightly lower than consensus estimate of 5.3%. Fading base effect is part of the reason for the rise in inflation. IIP numbers at 3.8% has been encouraging especially the manufacturing and capital goods numbers.

While prima facie the numbers looks good, analyst’s expectation from Dr Rajan is mixed. HSBC says that both inflation and growth data reinforce the case for monetary easing this year. HSBC expects the central bank to cut interest rates by 50 basis points in 2015. Motilal Oswal points out that target retail inflation overcoming the adverse base effect is likely to remain well within the comfort zone, and continued state of fragile industrial sector, expects RBI to initiate the rate cut measures in the upcoming policy review scheduled on Feb 3, 2015. Rating agency CARE also expects a 25 basis point cut by Dr Rajan in the February policy.

Financial advisors SPA says, that a policy easing by RBI would be crucial at this juncture to pump in credit growth and accelerate new projects. Borrowers are switching in to debt issues against bank borrowings to take advantage of lower yields. The return of monies into banking segment would enhance the money multiplier and aid growth into industrial sectors of the economy.

Citi Research is even more bullish on a rate cut scenario. In its report Citi points out that given current growth-inflation dynamics and RBI’s December policy statement of the possibility of acting “outside the policy review cycle”, we would not be surprised if it does cut before the February budget.

However, there is another set of view that says that Dr Rajan will hold on to interest rates. HDFC Securities feels that global events might prevent Dr Rajan from cutting rates. According to the research firm the primary reason being, the world is negotiating a blind curve in the form of Greece elections and even before that a judgment by the apex German Court could derail the plans of the ECB to start buying bonds. They feel that RBI would allow the storm to pass before using the scalpel. Emkay also feels that the governor will hold on to the rates.

For the governor the period ahead is even more challenging as he stares at global uncertainty and domestic pressures to cut rate and boost growth. 

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