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After a surprise interest rate cut from the Reserve bank of India on Thursday, heavy speculations begun around whether the central bank will lower policy rates again in April or probably ahead of the general elections starting in May to support the slowing economy and boost credit growth.
Looking at the current scenario, economists are divided on the view whether Thursday’s cut was required, as some believe that the central bank could have waited a little more as core-inflation still shows an upside risk to inflation.
“A low level of headline inflation provided justification for the move. But with core inflation high, and a growing perception that the central bank has allowed its focus on controlling inflation to slip, higher inflation and higher interest rates are likely over the long term,” noted Mark Williams, chief Asia economist at Capital Economics.
However, it is a good news for the BJP-led Narendra Modi government just ahead of the 2019 general elections.
“The RBI’s new governor Shaktikanta Das has delivered what the Modi government was hoping for.”
The bias for monetary policy was clearly towards possible accommodation and the timing surprised most of the market participants and feel the decision was a little hasty.
At the same time, inflation internals has been very volatile, and there was no real urgency to cut rates to support growth when fiscal policy is already simulative.
So holding the rates would have given a sense of the likely direction of fiscal policy; a more populist government after the polls would warrant a progressively hawkish central bank.
Most of the economists, therefore, forecast rates should be on hold from here until Q2 of 2019, but given that the bank has uncovered an inclination for dovishness, a further cut in April would not stun markets.
“With the latest 25bps rate cut, we see room for another 25bps cut in 1QFY20, mostly in April, with inflation likely to remain muted in 1HFY20. The RBI does not see near-term risks to inflation from the interim budget proposals to boost farm income,” noted Teresa John, an economist at Nirmal Bang.
