India predicted to ease rates by another 50bps

Signs of investment cycle recovery are visible.

In India, it has been forecast that the RBI could ease rates by another 50bps in the June and September meetings.

According to a research note from Maybank Kim Eng, it derives comfort from the government’s fiscal-deficit target, which appears within reach.

It also noted that legislative reforms like passage of a coal & mining bill and a pending law on land acquisitions could ease input price pressure.

As per RBI, early signs of investment cycle recovery are visible. This bodes well for credit growth, said Maybank Kim Eng.

Lower interest rates would ease pressure on borrowers leading to lower asset quality stress.

Here's more from Maybank Kim Eng:

Transmission of rates will begin soon - Lack of transmission of two earlier rate cuts was the primary reason sighted by RBI for maintaining the status quo.

With comfortable liquidity conditions and slow credit off take lending rates are bound to fall. As reduction in deposits rates in select maturity had started in November last year, it will gain momentum.

Base rate cut will follow. On base rate calculation, the RBI suggested it should be based on marginal cost of funds instead of average cost of funds.

With cost of funds falling 50-75bps in the past six months the scope for lending rate cut has increased. On
inflation, the RBI would like to wait for further data to study the impact of unseasonal rain.

The RBI’s CPI forecast suggests it would drop to 4% by Aug’15 and then firm up to 5.8% by Mar’16. In our view, CPI target of 4% by end of 2017 looks achievable.