RBI opens the door for a rate cut early 2015: CRISIL

Reserve Bank of India (RBI) has held the repo rate steady at 8% as expected. CRISIL expects inflation to average at 6.7% in FY15 and the RBI to cut rates by April 2015.

In today’s rather dovish monetary policy statement, RBI indicated that a change in its monetary policy stance is premature at this juncture. However, if the fall in inflation is sustained, inflationary expectations remain contained and fiscal developments are encouraging then a change in monetary policy stance is likely early next year. The RBI kept its central estimate for growth at 5.5% while revising its inflation projection down to 6% by March-end FY15.

In the medium term, RBI expects inflation to hover around 6% assuming a normal south-west monsoon, lower crude oil prices and no change in administered prices barring electricity. RBI governor also mentioned that the RBI is in the process of finalizing the monetary policy framework, and the government seems comfortable with adopting a target of around 4% with a band of +/-2% beyond 2016. 

The liquidity in the banking sector has improved and currently the reverse repo rate of 7% is effectively the short-term effective rate to which other short-term market rates are linked. The yield on 10-year g-sec has also been easing in recent months – due to higher liquidity, falling inflation and lower pressure on government borrowings with declining oil prices. However, even as deposit rates and short term rates are starting to decline, lending rates will be slow in coming down.