Views turn dovish, RBI seen cutting rates, finds poll

Most economists polled now expect the Reserve Bank of India (RBI) to cut interest rates at its policy review later this month, driven by dismal economic data, falling oil prices and recent comments by a central bank official.

For many, that marks a recent change in view.

Of 20 analysts polled, 15 expect the RBI to cut the repo rate on June 18. Of those, 11 expect a 25 basis point cut to 7.75 per cent and four expect a 50 basis point cut.

The RBI last cut rates on April 17 by a sharper-than-expected 50 basis points, bringing the repo rate to 8 per cent, after which most economists had expected it to leave rates on hold in June.

In the last Reuters poll, conducted before the RBI's April policy move, only two out of 14 respondents expected the repo rate to be below 8 per cent by the end of June.

While expectations for a rate cut grow, many economists and traders say only policy reforms by the government can revive growth for an economy that was expanding near double digits before the global financial crisis.

"In our view, interest rate cuts are only a quick fix to growth. Without concomitant fiscal tightening, loose monetary policy will likely fan inflation and lead to greater macroeconomic instability down the road," Nomura economists wrote in a Tuesday note.

Economists have scaled back expectations for a cut in the cash reserve ratio for banks, the poll showed, as liquidity conditions improve thanks to government spending.

Only six of 20 economists polled expect a June 18 cut in CRR, which now stands at 4.75 per cent after the RBI left it on hold in April.

In the poll before the RBI's April policy meeting, 12 of 13 respondents had expected CRR to be cut by the end of June.

Also, economists have increased their expectations for rate cuts for the remainder of the fiscal year. The median repo rate expectation stands at 7.50 per cent by the end of March 2013, compared with 7.75 per cent in the early April poll.

The poll also shows that 12 of 16 economists have downgraded their India economic growth forecasts for the current fiscal year over the past month, and expect a median 6.5 per cent growth, from 7 per cent previously.

The case for a rate cut has been fuelled by a far worse than expected tumble in economic growth for the March quarter to a nine-year low of 5.3 per cent. A drop in global oil prices to below $100 a barrel from $120 a barrel in mid-April adds to expectations for rate cuts.

On Monday, RBI deputy governor Subir Gokarn said falling global oil prices, declining core inflation and sluggish growth gives room to cut rates, although he added that high food prices and a wide fiscal deficit add to inflationary pressures.

Copyright: Thomson Reuters 2012