GDP forecast fuels Reserve Bank of India rate cut hopes

GUWAHATI: Reserve Bank of India governor Duvvuri Subbarao on Thursday said the central bank will take the lower GDP growth projection into account while framing the next monetary policy, raising hopes of another 25 basis points (bps) cut at the least in March. The Central Statistical Organisation (CSO) has cut the GDP growth forecast to 5% for 2012-13 based on advanced estimates.

Last week, the RBI had lowered it to 5.5% from 5.8%. The economy grew 5.3% in the July to September quarter, the slowest in last three years. “There is a strong possibility of a 25 bps rate cut by RBI,” State Bank of India’s chief economist Brinda Jagirdar told ET, reacting to Subbarao’s statement. “As the negative output gap has widened, any rise in growth will not impact inflation.”

Shubhada M Rao, senior president and chief economist with YES Bank, expects another 50-75 bps cut in repo rate by December. “The lowered growth estimates may not necessarily frontload the rate cut, but a 25 bps cut may be in the reckoning and can happen as early as in March.”

Governor Subbarao, who held the RBI’s board meeting in Guwahati on Thursday, said: “I am unable to comment on rate cuts at this forum. As the meeting was in progress we got to know about the CSO projection. We will take that into account as and when we make our next policy.”

The central bank reduced the benchmark rate and cash reserve ratio by 25 bps each on January 29 in its policy meeting, but the governor had cautioned the market about high current account deficit and sticky food price inflation.

“Our assessment of fiscal deficit and inflation was indicated in our policy review on January 29. We have taken note of the road map for fiscal consolidation put out by the finance minister. And like everyone else in the country and around the world, we are also looking forward to the Budget to have a better understanding of how fiscal consolidation could be done on the way forward,” Subbarao said.