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Monday, November 17, 2014

Goldman Sachs expects RBI to cut rates by 50 basis points in 2015

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Mumbai, November, 17, 2014: The Reserve Bank of India (RBI) will begin cutting interest rates in the first quarter of 2015 and reduce rates by 50 basis points during the course of the year, investment bank Goldman Sachs Group Inc. said in a note released on Monday. 

RBI’s benchmark signalling rate (repo rate) currently stands at 8%. One basis point is one-hundredth of a percentage point. 

“We have changed our rate call to build in 50 bps of rate cuts by RBI in 1H2015 (first half of 2015) from our earlier call of RBI on hold. We expect RBI to cut by 25bps each in February and April,” said Goldman economist Tushar Poddar in the note, explaining that the main driver of this call is the fall in global oil prices. 

“The recent sharper-than-expected fall in headline inflation, contained core prices, and no sharp increase in food prices despite a weak monsoon buttress the change in our rate view,” added the report. 

Goldman also cut its forecast for consumer price inflation in fiscal year 2016 to 5.8% compared with 7% earlier, below RBI’s target of 6% by January 2016.

To be sure, Goldman does not expect RBI to be aggressive in interest rate cuts due to the deeply entrenched inflation expectations.

“India has had an extended period of high and sticky inflation. This has led to deeply entrenched inflation expectations, which were at 13.5% in 3Q2014 for one-year ahead... Therefore, we think a prolonged period of weak inflation would be required for expectations to come down,” writes Poddar in the research note, adding that entrenched inflationary expectations, uncertainty about commodity prices, and the need to establish the credibility of the new inflation targeting framework may prevent steeper rate cuts.

Expectations of interest rate cuts have risen in recent months due to a quicker-than-anticipated fall in retail and wholesale inflation. Wholesale price inflation fell to 1.77% in October, while consumer price inflation fell to 5.52%. 

At 12.28pm, yield on the 10-year government bond was at 8.179%, compared with its Friday’s close of 8.217%. Bond yields and prices move in opposite directions. Since the beginning of October, the 10-year yield has fallen 33.4 bps to 8.179% from 8.514%. Year-to-date, the 10-year bond has dipped 64.50 bps to 8.179% from 8.825%.

Courtesy: Live Mint

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