Photographer: Punit Paranjpe/AFP via Getty Images

economics

Speculation Builds That India Rate Cut Could Come by February

Speculation Builds That India Rate Cut Could Come by February

Photographer: Punit Paranjpe/AFP via Getty Images

Speculation is building that the Reserve Bank of India may lower interest rates this year, possibly as early as its meeting next month.

With inflation at risk of undershooting the 2 percent lower boundary of the central bank’s target, Mumbai-based AMBIT Capital Pvt is predicting a 25 basis-point reduction at the February policy meeting, with an outside chance of an even bigger cut of 50 basis points.

While the RBI’s tight policy stance made sense until December last year, it needs to reviewed given the sharp slowdown in inflation, AMBIT’s economists Ritika Mankar Mukherjee and Sumit Shekhar wrote in a note. Data on Monday will likely show inflation eased to 2.2 percent in December from 2.3 percent in the previous month, according to a Bloomberg survey of economists.

Softening Prices

India's inflation rate is below the RBI's 4% medium-term target

Source: Bloomberg

*Expected CPI based on a Bloomberg Survey

The RBI is likely to change its policy stance to “neutral” from “calibrated tightening” and keep it there until the next financial year, AMBIT said.

Complicating the RBI’s decision is the recent appointment of Governor Shaktikanta Das, a former bureaucrat who is seen as more willing to appease Prime Minister Narendra Modi’s administration. He’ll face questions about the central bank’s autonomy if he cuts interest rates too quickly.