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Market bets on interest rate cut; RBI might watch inflation

NetScribes/Pallavi Rao

The market is anticipating a lower interest rate regime. It is not just global developments, but even domestic compulsions are pointing towards an easy rate scenario. Economists are unanimous in their view that the Reserve Bank of India has no option but to lower the Bank Rate by 50 basis points. This is likely to happen after the Budget on February 28, analysts feel.

"We will see an interest rate cut somewhere in March this year. Linkages between the global economies will force the RBI to cut interest rates by half a percentage point. The only hesitation might be that an easy money scenario might fuel inflation," said Partha Mukherjee, vice president, treasury, UTI Bank.

The US Fed's decision to cut its benchmark rate by 50 basis points triggered a rate cut in other parts of the world including Australia, Korea and Japan. Speculations are rife that RBI would follow suit.

As Hemindra Hazari, analyst with European-based investment bank UBS Warburg, puts it: "The domestic situation will be the deciding factor; global events alone will not dictate the rate cut." The inflation based on wholesale price index is currently ruling at an all-time high of 8.29 per cent, while the index of industrial production is lagging behind. This suggests a cost-push inflationary situation. Economists believe that only softening interest rates can help in bringing down costs and kick-start industrial activity.

"There has been some amount of slowdown in the domestic economy. The RBI too has indicated this by taking no steps to curtail falling yields. Though the headline inflation is high, core inflation is still low. We can see a 50 basis point rate cut in another 2-3 months," said Ashish Parthasarthy, head of trading, HDFC Bank.

Hazari concurs: "The proceeds from the IMD issue has pulled yield figures down."

The recent earthquake in Gujarat has also lent credence to the theory that higher expenditure on this account will force the government to borrow. The government is planning to impose additional quake surcharge to avoid borrowings. But a slippage on the public sector divestment target has created a dent in the government's revenues. This has to be now bridged by additional borrowings. "The RBI will go in for a rate cut to facilitate government borrowings," he added.

The arguments seem convincing and veer towards a rate cut. Will the RBI Governor follow suit? Probably, Sinha's budget will provide the lead.

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