RBI to cut rates by 0.25 percent next week in latest cut of cycle: Report

The Reserve Bank will decide to further cut the key repo rate by 0.25 percent at its next monetary policy review on February 6, which should be the last cut in the current easing cycle, a foreign brokerage said on Tuesday.

“…we believe the RBI could continue to cut interest rates based on future inflation rates remaining favorable and growth likely to moderate,” Bank of America economists said in a note.

There is “uncertainty” over the growth outlook and the RBI is likely to use the policy space to cut the repo rate to 5.25 percent.

The move will be accompanied by significant liquidity injections with slightly longer-term liquidity assurance, the brokerage said.

In a report that comes days after the central bank announced liquidity infusions of Rs 2 lakh crore, the brokerage said that ongoing forex interventions and volatile liquidity movements warrant “substantial liquidity support” from the RBI to help pass-through of rate cuts.

The report went on to say that it does not see weakness in the rupee becoming a significant source of noise for the rate cut cycle.

“If RBI does cut, we believe it would be the last cut in the cycle, but if it doesn’t, RBI may continue to issue dovish guidance to keep its options open,” the company said. Inflation is likely to undercut the RBI’s short-term projections and the central bank is also likely to raise its GDP growth forecasts, the report said.

The high-frequency data shows some resilience, especially in the industrial and consumer sectors, the report said, adding that the RBI can take some comfort from this.

But there are many moving parts that complicate the policy’s path, he said.

“Compared to the December meeting, the RBI has seen an improvement in the macro operating environment, but market dynamics have deteriorated, complicating the backdrop against which it approaches the February policy meeting,” the RBI said.