Analysts see rates falling more, but doubt efficacy

The Reserve Bank is not yet done with the easing cycle as another rate cut is in the offing through the course of the fiscal, analysts said on Friday but questioned the efficacy of such moves to push growth in the face of other factors afflicting the economy.

Various analysts see the RBI going ahead with another 50 bps reduction going forward in one or two rounds, beginning with the December review which means the rate will breach the lifetime low of 4.75 per cent.

With the fifth straight reduction on Friday, the repo is already at a decadal low of 5.15 per cent.

The RBI lowered the key rates by a widely expected 0.25 per cent citing more headwinds to growth and affirmed support to do more heavy lifting if inflation supports.

"Even though RBI has clearly emphasised more rate cuts, the efficacy of such an action is questionable given the elevated household leverage, deteriorating corporate fundamentals (upgrade to downgrade ratio has now halved) and significantly weak demand," SBI economists said in a note.

The note said total credit supply to the commercial sector in the first six months of the fiscal is barely Rs 90,000 crore as against the Rs 7.6 lakh crore in the same period last year which indicates that aggressive rate cuts are "not helping".

In a note, domestic rating agency Crisil said the accommodative stance, in conjunction with weak economic outlook-it, lowered its GDP forecast by a sharp 80 bps to 6.1 per cent--implies that the output gap is unlikely to narrow soon and another rate cut is in the offing.

India Ratings said if inflation remains within the target, the RBI can cut rates by another 0.50 per cent at best because the window for more cuts is dwindling.

Care Ratings expects another 0.25 per cent more reduction and also cut its GDP growth forecast to 6.2 per cent, which is a notch above the RBI's revised numbers.

Some analysts like audit and consultancy firm KPMG said transmission of the policy actions in rates is of the essence at present.

It can be noted that in the Reserve Bank has said the weighted average lending rate has come down by only 0.29 per cent as against the RBI's policy rate cuts of 1.10 per cent till August.

Analysts at Wall Street brokerage Goldman Sachs said they see a high probability for a final 25 bps cut to bring the repo rate to 4.9 per cent in the December policy review.

"It would be consistent with our forecast for an additional rate cut by the Fed in October," they said.