French brokerage BNP Paribas sees ideal conditions for 0.25% rate cut on June 2

MUMBAI: Stating that conditions are ideal for rate cut, French brokerage BNP Paribas today said a 0.25 per cent reduction can help discussions between the central bank and the Finance Ministry on setting up of inflation targeting panel.

"With critical negotiations between the Reserve Bank and North Block over the composition of the new interest rate-setting Monetary Policy Committee (MPC) still underway, a 0.25 per cent rate cut could judiciously help lubricate these discussions at little potential macroeconomic cost," the brokerage said in a note.

It can be noted that after adopting formal inflation targeting, the Finance Ministry and the RBI are in discussions on the composition of the five-member MPC that will be deciding the key issue of interest rates.

According to media reports, there is no agreement over who will appoint the two members from the RBI to be a part of the committee. The RBI wants Governor Raghuram Rajan to appoint these members, which may not be acceptable to the government, the reports said.

The note by BNP Paribas said this is Rajan's final chance to deliver the cut as the factors influencing it will only get difficult with time.

"The RBI has an opportunity to deliver a third, but likely final, 25 basis points cut in the repo rate on June," it said, adding the factors like threat of inflation fanning up due to a likely bad monsoon and the climbing oil prices, and the expected hike by US Fed in September which can lead to choppiness in the markets, can make it tougher to cut later.

Factors which make the case for a cut include the low retail inflation which came in under 5 per cent in April, the government bringing down the fiscal deficit target by 10 bps at 4 per cent, sluggish growth in factory output and credit growth being slow, it further said.

On the transmission, it said Rajan has a choice to either "admit to impotence or try harder to spark transmission."

Only a few banks, led by State Bank of India, have cut their key rates after being chided by Rajan for not passing the 0.50 per cent cuts to borrowers in two surprise installments in January and March.