India may cut rates this afternoon, but it will be an incredibly close call

Photo by Stu Forster/Getty Images

Later today the Reserve Bank of India (RBI) will announce its September monetary policy decision, with markets evenly split on whether or not the bank will cut interest rates further.

Having cut its key repo rate by 0.25% to 7.25% at its June policy meeting, the RBI left monetary policy unchanged in August, stating that it was “prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy”.

“Significant uncertainty will be resolved in the coming months, including the likely persistence of recent inflationary pressures, the full monsoon outturn, as well as possible Federal Reserve actions,” the bank said.

“As the Reserve Bank awaits greater transmission of its front-loaded past actions, it will monitor developments for emerging room for more accommodation.”

Given that the US Federal Reserve did not tighten monetary policy at its September meeting, along with the continued decline in wholesale price inflation which fell 4.95% in the year to August, the steepest decline on record, expectations for further rate cuts from the RBI have grown in recent weeks.

While she believes that a rate cut this afternoon is “not a done deal”, ANZ senior economist for South Asia and ASEAN Devika Mehndiratta is one analyst who believes the RBI will cut interest rates today.

“We expect a 25bps rate cut at the RBI’s meeting next week on 29 September,” she said.

“The central bank had indicated that further easing would depend on incoming inflation, which has been lower than the RBI’s projections. In addition, the RBI had also said it would be watching uncertainties such as a September hike by the FOMC. Here, too, the stage is now clear.”

Although Mehndiratta is in the rate cut camp, she suggests those looking for a raft of cuts from the RBI in the period ahead may end up being disappointed.

“In its forward guidance, we think the RBI may formally introduce the lower goalpost of 5% for inflation for January 2017 (the current target is 6% for January 2016),” she notes.

“Introducing a 5% inflation target may sober expectations of further easing by the RBI. The market is expecting a longer and deeper easing cycle – markets are pricing in another 75-80bps of cuts by end-2016.”

She also outlines why today’s decision will be a close call, with uncertainty about the outlook for inflation being partially offset by political pressure to ease monetary policy further.

“A cut won’t be an obvious choice for the RBI because the central bank had also said that it would watch the incoming monsoon – whose performance has been on the weak side – which will inject some uncertainty about the sustainability of low food inflation. Incoming retail prices in September of select foods have shown some uptick from the recent sub-trend momentum. All these, combined with increasingly vocal voices from the Ministry of Finance for the need for a rate cut, will create a high pressure environment for the central bank when it makes its decision,” she states.

The RBI will announce its September policy decision at 3.30pm AEST. Business Insider will have full coverage as soon as the decision is announced.

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