HYDERABAD: Days after the Reserve Bank of India slashed repo rate to 7.5 per cent, Japanese brokerage Nomura said policy rates have reached neutral and the average rate over the next three years should be around 7.4 per cent.
It also expects policy rates to remain unchanged at 7.5 per cent until 2017 and if the RBI cuts more then there will be rate hikes in FY17 to push inflation down to 4 per cent by March, 2018.
“Based on our inflation and growth forecasts, and the RBI’s inflation targets, we estimate that the average policy rate over the next three years should be about 7.4 per cent as the policy rates have reached neutral,” it said.
According to Nomura, with growth shifting higher, the government already focused on reviving growth by kick-starting public investment in infrastructure, inflation is likely to stabilise at 5-5.5 per cent and external risk factors growing, the case for incremental monetary policy easing no longer exists, if the RBI is serious about 4 per cent inflation.
The economists, however, predicted a risk of another 25 bps cut this year but maintained its baseline view of no further cuts.
Terming the rationale laid out by RBI Governor Raghuram Rajan for this inter-meeting cut as very weak, Nomura said the real reason for the cut may lie outside the economic domain and could be a quid pro quo for the monetary policy framework, where the government has largely accepted the Urjit Patel panel suggestions.
Meanwhile, it expects inflation to undershoot the RBI's targets until January 2016, remain largely around the targets in FY17 and overshoot in FY18. “This is because the complete pass-through of lower oil prices is yet to materialise, which may result in some undershooting of CPI in H1 of 2015.”
However, with oil prices now inching higher, growing recovering and both fiscal and monetary policy turning less restrictive, we expect CPI to stabilise in a range of 5-5.5 per cent.
The brokerage is bullish on the rupee as it expects the latest rate cut to raise growth expectations, help attract further foreign inflows into the local asset markets.