Expect RBI to cut rates by 25 bps at next policy meet: Sanjay Mathur, RBS

In a chat with ET Now, Sanjay Mathur, MD & Head Economics Research, RBS, talks about the global economic scenario. Excerpts:

ET Now: What is your take on yesterday’s RBI policy meet?

Sanjay Mathur: If we look at the RBI’s stance, it is quite clear that they are not averse to cutting interest rates. It’s just that there is a need to see an augmentation of the transmission mechanism.

We have seen banks respond, and our guess is there will be a 25-bps cut as early as the next meeting. The forecast is that that inflation will go down to about 4% in August 2015, and start to rise thereafter. So, the window of opportunity for the RBI is really now.

ET Now: Bank of Japan’s crucial decision on interest rates is coming. What are your expectations from the same?

Sanjay Mathur: Our view is that today we will not see much of a change. We will not see a change in stance.

As inflation is non-existent and inflationary pressures have weakened even further, there is a risk there that deflation can start to grip the economy again. But they do have the benefit of a somewhat tighter labour market. Also, the volume growth in Japan’s export has been reasonably good. All in all, we do not think they will use this ammunition today.

ET Now: Deadlines come up for Greece tomorrow in terms of repayments. What is your sense? How much threat do you see of a refolding by Greece? What are the risks to Asia from that?

Sanjay Mathur: Regarding this particular payment, it seems they are reasonably comfortable with it. They would be able to do it. More important will be what happens further out. I don’t think this episode is going to pose a problem.

However, if further out Greece does default or in any way requires to exit the EU, it would then have a huge contagion impact on the Asian as well as global markets. There would be no escaping from that. But as of now this is not a base case for this episode.