After Notes Ban, How Long Can Urjit Patel Remain Accommodative?

Economists predict Indian central bank Governor Urjit Patel will deliver a final interest-rate cut Wednesday to buoy growth, though the question is whether he will acknowledge it as the last of this cycle.

The Reserve Bank of India will lower the repurchase rate to 6 percent from 6.25 percent, according to 34 of 39 economists in a Bloomberg survey. The rest see no change. The rate will stay there at least until June 2018, a separate survey shows, ending a streak of seven reductions since January 2015. If Patel omits any mention of "accommodative" policy, it would be the RBI's first change in stance since June 2015.

With deposits surging and economic growth seen dipping to a four-year-low after Prime Minister Narendra Modi's cash ban, Patel is under pressure to lower borrowing costs before a global window for easing closes. The U.S. Federal Reserve left its benchmark lending rate unchanged last week and said inflation will rise to its target even with "gradual" adjustments in interest rates.

"We retain our call of a residual 25 basis point cut even as the decision in the upcoming policy review will be a close call," said Abhishek Upadhyay, an economist at ICICI Securities PD in Mumbai. "This is also amplified by how the monetary policy committee chooses to communicate that interest rates have bottomed out along with the forecast of a prolonged pause."

The monetary authority will announce its decision at 2:30 p.m. in Mumbai followed by a press conference 15 minutes later.

Growth Concerns

Government officials have sought monetary stimulus to boost gross domestic product. Growth may dip as low as 6.5 percent in the year through March from 7.9 percent the previous year as the cash squeeze dents demand, Finance Minister Arun Jaitley's advisers predicted last week. While the government will publish its forecast on Feb. 28, investment is poised to fall for the first time since 2013 even before accounting for the impact of the cash ban.

Inflation Soothes

Consumer prices rose 3.4 percent in December from a year earlier, below the 4 percent mid-point of India's inflation target for the second straight month. Bloomberg Intelligence analyst Abhishek Gupta says the dip in core inflation -- which strips out volatile food and fuel -- opens space for Patel to cut rates.

The RBI's six-member panel voted unanimously to keep rates unchanged in December as it wanted to assess the impact of the cash clampdown and the Fed's stance. It reiterated its commitment to the inflation target and warned about the risk of rebounding oil prices.

Budget Comfort

Patel will have some comfort on government spending. Jaitley on Feb. 1 vowed to narrow the budget deficit to 3.2 percent of gross domestic product in the year starting April 1 from 3.5 percent the previous year. While wider than an earlier target of 3 percent, the goal is lower than economists' estimates of 3.3 percent and, if met, the shortfall would be the smallest in a decade.

"We expect the RBI to deliver a 25 basis point repo rate cut on Feb. 8, given continued fiscal consolidation and likely undershooting of its near-term inflation target," said Sonal Varma, Singapore-based economist at Nomura Holdings Inc. "However, with global factors turning adverse, this is a close call."