The Reserve Bank of India is keeping the country's key policy rate unchanged at 8%, but is reducing the mandatory amount of bonds lenders must park at the RBI by 50 basis points to 22.5% of deposits, starting in mid-June - AFP Photo.
BENGALURU: India's central bank will probably keep interest rates on hold at its meeting on Oct 4, although the decision is close, with tame inflation pointing to the strong possibility of a 25-basis-point rate cut by the end of the year, a Reuters poll showed.
Next week's review is governor Urjit Patel's first as chief of the central bank, and several analysts in the poll said they expect him and the newly-formed Reserve Bank of India Monetary Policy Committee to follow a more dovish path than his predecessor Raghuram Rajan.
During Rajan's three-year term, inflation was routinely running well above 5%, the target set for March 2017. But it fell to a five-month low of 5.05% in August, giving the new RBI governor leeway to cut rates.
The consensus view of 44 economists surveyed this week showed the central bank will leave the repo rate unchanged at 6.50% on Oct 4. However, just over 40% of them - 18 of 44 - forecast a cut, with most of them saying by 25 basis points.
While opinion is divided for the October meeting, there is almost unanimous agreement of a cut going forward. Most expect the repo rate to be cut to 6.25% by end-December and then again to 6.00% in the third quarter of next year.
"Room for another cut does exist... and given weaker gross domestic product and industrial production readings, it will likely be used," said Hanna Luchnikava, senior economist at IHS Markit.
Annual gross domestic product (GDP) growth in Asia's third-largest economy slowed to 7.1% in April-June from 7.9% the previous quarter, stymying the government's efforts to boost growth to more than 8% to create jobs for millions of unemployed youth.
The new RBI chief is also likely to focus more on growth than worry about inflation, analysts said.
While recent wage increases for government employees are likely to push both consumer demand and inflation higher, above-average monsoon rains, vital for India's vast farm sector, are expected to cool food prices.
But with food inflation risks still lingering, Luchnikava said the RBI would rather wait until December to cut.
Although the RBI wants to bring inflation down to 4% in the medium term, more than half of economists who answered an additional question in the poll - 17 of 30 - said it would not tie itself down to a timeline at the Oct 4 meeting.
"The RBI is unlikely to specify the deadline for such an aggressive inflation target," said G. Chokkalingam, founder of Equinomics Research and Advisory.
The vast majority of poll respondents said the RBI would not change its March 2017 deadline for banks to recognise their bad assets. The poll also found the RBI would freeze its cash reserve ratio at 4.00% until the end of next year. - Reuters
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