RBI may cut rates sooner than expected: DBS

The Dollar Business Bureau 

Though rupee volatility and global uncertainties suggest that first three-month period of 2017 is a favourable time to ease rates, Reserve Bank of India (RBI) may cut rates soon, most probably in December in order to support the growth and tap favourable outlook of inflation, according to a report by DBS. 

After the demonetisation move by the Indian government, the dampening effect on economic activities is clear, mainly on supply chain, consumption and the businesses dependent on cash transactions and inflation, in the current and next quarter, said the global financial services major in the report.

“On policy, while external uncertainties and rupee volatility suggest first quarter of 2017 is a better timeline to ease rates, the central bank might prefer to bring forward the rate cut to December to support growth and tap favourable inflation outlook,” DBS said in its research note. 

In October, the Monetary Policy Committee (MPC) chaired by the RBI Governor Urjit Patel cut the benchmark interest rates by 25 basis points to 6.25%. The next policy review by RBI is scheduled on December 7. 

Prime Minister Narendra Modi, on November 8, had announced the demonetisation of Rs.500 and Rs.1,000 notes, making these banknotes invalid. 

“Officials are focussing on the aspects of implementation, with withdrawal limit and restrictions on usage tweaked on a continuous basis to lessen short-term strain,” the report stated while adding that as a whole, the progress has and will be steady and incremental.

In the next month, deposits are expected to accrue, but the pressure will ease when limit for withdrawals is eased and the access to other transaction modes become simpler, it said.