Reserve Bank unlikely to cut key rate in February: Report

Team Udayavani, Jan 5, 2017, 5:29 PM IST

Mumbai: Reserve Bank is unlikely to cut repo rate in the February review meeting due to the prevailing global uncertainties and it’s stance may continue to be accommodative next year as inflation is expected to remain benign, according to a report.

“We expect RBI may not oblige with a rate cut in February as global uncertainties may again play spoilsport, according to Ecowrap, an SBI research report.

It said inflation trajectory is expected to remain significantly benign. The December inflation numbers may witness a reading closer to 3.2-3.3 per cent.

“Though inflation may increase in March, it may still be closer to the lower band of 4-4.5 per cent. Hence, the scope for accommodative monetary cycle will continue even in the financial year 2017-2018,” the report said.

It further said during April-October, when the repo rare was slashed by 50 basis points, the growth in incremental credit to housing was around Rs 64,000 crore.

In the demonetisation period (November-December 2016), though there was a negative growth in incremental credit, housing credit still managed an increase of Rs 4,063 crore.

“With rate cuts by banks like SBI now being 90 basis points at one go, clearly the evidence is strong for a credit growth rebound at least in the housing sector,” the report said.

Talking about demonetisation, the report said as on December-end only 44 per cent of the banned currency has been replaced as against the earlier estimate of 53 per cent.

One possible reason for this could be that RBI is also printing notes of smaller denominations apart from Rs 500 bills and hence the total value getting replaced is lower than projections, though the number of pieces may not, it said.

“If we assume that the RBI continues to print as it is doing as of now, then by January-end, only about 67 per cent of the currency should get replaced (vis-à-vis earlier estimate at 75 per cent).”

By February, at this rate, the RBI could thus print as much as 89 per cent of the total currency, it said.

It, however, said if he the apex bank decides to shift its printing more towards smaller denomination, this number could be close to 80 per cent.

The report said things will be closer to normal by February-end as opposed to predictions of the currency swap exercise-linked crisis lasting longer.

“If this is the case, the possibility of GDP bounce back faster than anticipated may not be ruled out.”

In any case, a lower growth this year will give the government significant advantage next year in terms of a lower base, the report added.