EcoScope Back
Ghosts of previous stance could delay rate cut

In its upcoming monetary policy on August 2, 2017, a majority of the participants expect RBI to cut policy rates by 25 basis points (bp), bringing repo rate to 6%. We believe that the RBI must show conviction in the massive disinflation in the economy and announce a 50bp cut rather than a customary 25bp cut. However, the fear of 'it's too early to take a U-turn' and the challenge of a simultaneous change in the mindset of three committee members (out of
five) might postpone the rate cut to October 2017. In any case, we believe a 50bp rate cut is imminent.

Assigning weights is critical
While one could talk about several factors supporting a ratecut, the arguments to remain cautious are equally relevant and valid. As is almost always the case, there are an equal number of factors demanding caution as the factors supporting monetary easing.
Exhibit 1 below provides a list of factors in support of monetary
easing and against it.

None of the arguments might appear new. The eventual decision would depend on the weights assigned to these factors. To our mind, the right-hand side –factors supporting rate cut – is heavier than the left-hand side, making us a proponent of a sharper-than-consensus rate cut.