Goldman Sachs expects RBI to ease policy rates by 25 bps in March

NEW DELHI: While the Reserve Bank of India’s ( RBI) action was ahead of market expectations but the central bank has expressed concern over the growth slowdown, Goldman Sachs said in note.

In its forward guidance, the RBI stated that with headline inflation likely to have peaked, it ‘provides space, albeit limited, for monetary policy to give greater emphasis to growth risks’.

This suggests that the central bank is likely to ease further going forward. Barring an upside surprise on inflation in the near term, or the fiscal deficit during the budget, Goldman thinks that the RBI will likely ease the repo rate by 25 bps in its March 19 policy meeting.

“This is consistent with our earlier view of a cumulative 50 bps of repo cuts in Q1, and is also in line with current market expectations,” added the Goldman note.

The central bank has further revised its GDP growth forecast for FY13 down to 5.5 per cent from 5.8 per cent earlier. The RBI further added that ‘the moderation in inflation conditions provides the opportunity for monetary policy to act in conjunction with fiscal and other measures to stem the growth risks.’

While the RBI action was ahead of market expectations, the brokerage firm expects the central bank to ease more on repo rather than CRR. The RBI slashed the Cash Reserve Ratio (CRR) of banks by 25 bps to 4.00% from 4.25%, more dovish than market expectations of no CRR cut.

“We agree with the RBI’s dovish commentary and the lower inflation and growth projections for March 2013. We think that the RBI has correctly emphasized the greater risks to growth, rather than inflation at this point in the cycle in its policy statement,” said the Goldman report.