'Two more rate cuts within this fiscal year'

With the US Federal Reserve choosing not to hike rates in its meeting last week, the chances of rate cuts by the Reserve Bank of India by the end of the current fiscal have increased further, according to DBS Group Research.

“The RBI front-loaded 75 basis points (bps) worth of rate cuts in the first half of the calendar year 2015. The outlook for the second half (H2) was clouded by the US Federal Reserve’s rate direction and fallout from a weak monsoon. These risks have fallen modestly and provide a window for two more 25 bps rate cuts within this fiscal year, the first of which we expect this month,” DBS Group Research said in a note.

“While we see room for measured cuts, scope of an aggressive and extended rate-cutting cycle remains slim. Base effects are likely to keep inflation firm in FY17, alongside risks of an upturn in commodity prices,” DBS said.

CPI inflation targets are also likely to be adjusted lower over the next couple of years and eventually head to the four per cent medium-term goal. This will require the central bank to calibrate monetary policy in an incremental manner.

Moreover, structural tailwinds to India’s recovery by way of crucial reforms are on a slow lane, with progress on GST, land acquisition and labour reforms delayed at least until the winter parliamentary session in Nov/Dec.