Widespread expectation of RBI rate cut on Tuesday

Widespread expectation of an interest rate cut by RBI Governor Raghuram Rajan at the new fiscal’s first bi-monthly monetary policy review on Tuesday swelled equity markets in the last hour of trade on Monday, even as Finance Minister Arun Jaitley called for it.

“The government has stuck to fiscal deficit commitments and inflation has been under control. Therefore, I do hope that this movement will continue in order to make our economy more competitive with more competitive interest rates,” said Jaitley, while inaugurating the annual session of the Confederation of Indian Industry (CII) in New Delhi.

The barometer 30-scrip sensitive index (Sensex) of the BSE here, which opened on Monday at 25,333.98 points, closed at 25,399.65 points — up 130.01 points or 0.51 percent from the previous day’s close at 25,269.64 points.

At its sixth and the fiscal’s final bi-monthly monetary policy review in February, Reserve Bank of India (RBI) kept its key lending rate unchanged at 6.75 percent.

“The Reserve Bank continues to be accommodative even as it leaves the policy rate unchanged in this review, while awaiting further data on inflation,” Rajan said in his policy statement at the time.

Rajan is now expected to cut interest rates by at least a quarter of a percentage point on the back of the union budget’s fiscal prudence measures, reduction in small savings interest rates and low inflation.

“RBI is likely to cut the repo rate by 25 basis points (bps) in the first bi-monthly monetary policy review for FY17,” India Ratings and Research said in a statement.

“The central bank has kept key policy rates unchanged since the last six months, but as clarity on the government’s adherence to the fiscal road-map has emerged, prices have come under control and industrial activity continues to show weakness, Ind-Ra believes the RBI will restart rate reductions,” it added.

The government has cut the small savings interest rate by up to 1.3 percent, facilitating an RBI rate cut.

India’s annual retail inflation eased to 5.18 percent in February from 5.69 percent in the month before even as the 12-month wholesale inflation was in the negative for the 16th straight month, official data showed last month.

Rajan, last month, kept the cards close to his chest on possible easing of monetary policy with rate cuts, but said the government’s decision to stick to its fiscal targets was comforting.

He also said economic recovery in the country was not smooth, particularly after data on index of industrial production (IIP), released by the Central Statistics Office last month, showed India’s factory output had logged a decline in January for the third straight month.