India likely to cut interest rates in 2015 as inflation cools: BBVA

NEW DELHI – BBVA Bank is tipping the Reserve Bank of India to reduce interest rates in 2015 by a cumulative 50 to 75 basis points as inflation comes under control.

“High inflation has severely undermined India’s economic growth since 2012, prompting the RBI to unveil a series of aggressive interest rate hikes and adopt inflation targetting as its monetary policy regime,” BBVA says in a research note.

“Reassuringly, the past six months have seen inflation pressures dissipate beyond RBI’s expectations, raising the clamour for the RBI to cut policy rates to aid weakening industrial activity. Although still wary of premature policy easing, “the last policy meeting saw RBI signal likely rate cuts early in 2015 if current inflation momentum continues.

“While we expect the RBI to ease policy rates by 25 bps at its next meeting on February 3, a surprise pre-policy cut cannot be discounted. In this context, the December inflation out-turn, which releases mid-January 2015, will be a key input for RBI in timing its next policy move.

For the full year 2015, we expect RBI to cut policy rates by a cumulative 50-75 bps. However, given a weak monetary policy transmission, we maintain that an interest rate cut at this juncture would serve largely as a signal rather than a precondition to revive India’s sluggish growth.”  www.bbvaresearch.com (ATI).