(Repeats story sent late on Friday)
By Sumanta Dey and Rahul Karunakar
BENGALURU, Dec 2 India's central bank is
expected to cut interest rates next week and economists are set
to chop growth and inflation forecasts after Prime Minister
Narendra Modi's currency crackdown rattled the economy and
severely hurt consumption, a Reuters poll showed.
Modi's outlawing of high-value bank notes last month, aimed
at curbing corruption and tax evasion, has left the nation's 1.2
billion population scrambling to exchange old notes for new and
left many companies' cash-reliant supply chains in tatters.
India's economy expanded 7.3 percent in the July-September
quarter from a year earlier, making it the fastest growing major
country in the world. But it could easily lose top spot if some
of the more pessimistic views that suggest growth could halve
post-demonetization come true.
It could also drag inflation down. At 4.2 percent in
October, it is below the central bank's early-2018 target of 5
The median forecast in the poll of nearly 60 economists this
week was that the RBI's recently formed Monetary Policy
Committee will cut the repo rate by 25 basis points (bps) to
6.00 percent when it concludes its two-day meeting on Dec. 7
from 6.25 percent now.
Two-thirds of the respondents expected a cut, with 31 of 56
respondents expecting it to be 25 bps, while six predicted a
deeper 50 bps reduction. One said the RBI would slash rates by
"Given the concerns about demonetization and the slowdown it
is likely to generate in sectors that have traditionally been
cash dependant, such as consumption goods, the RBI will try to
cushion the blow with a rate cut," said Shilan Shah of Capital
Economics in Singapore.
Still, 18 analysts forecast no move next week. Only four of
them were based in India, suggesting domestic banks and research
houses closer to the real impact from the policy generally held
a more negative view on the effects of demonetization.
Consumer spending accounts for over half of India's output
and the overnight withdrawal of 86 percent of the currency in
circulation has left farmers, households and even companies
struggling to meet their daily needs.
The Indian rupee has weakened some 3 percent in recent weeks
to record lows. although a Reuters poll this week showed it is
unlikely to continue falling.
The deluge of cash pouring into banks has resulted in excess
liquidity, which the RBI tried to mop up with a temporary hike
to its reserve requirements last week. The poll found the cash
reserve ratio will be kept unchanged at 4 percent in December.
The reverse repo rate, which moves in tandem with the main
lending rate and is the interest the RBI pays to soak up funds,
is expected to be cut to 5.50 percent from 5.75 percent.
After next week, the consensus is that a final 25 bps rate
cut will come in the April-June quarter.
The RBI has chopped rates by 175 bps since January 2015 on a
global disinflation trend from lower energy prices and slowing
"With the banking system flush with liquidity, monetary
policy transmission should be better in the months ahead. We
expect the RBI to use the potential impact of demonetization as
a rationale for further rate cuts," said Kaushik Basu, economist
at Deutsche Bank in Mumbai.
While there is no clear indication on how much of a hit
growth is likely to take as a result of Modi's demonetization
drive, economists are certain it won't be minor.
All but one of the 29 respondents to a separate question in
the survey said they would be downgrading near-term growth
forecasts as a result of demonetization. The vast majority of
them also said the outlook for inflation would be lowered.
Analysts generally agree that under the newly-formed
Monetary Policy Committee chaired by Urjit Patel, the RBI's
stance has drifted somewhat away from former Governor Raguhuram
Rajan's priority on inflation towards underpinning growth.
"The RBI put its credibility on the line by cutting rates
the last time in October when there were still concerns that it
wouldn't meet its inflation target," said Shah of Capital
Economics, adding: "that is a clear departure from how monetary
policy was run under the previous governor Raghuram Rajan."
(Polling by Shaloo Shrivastava and Khushboo Mittal; Editing by
Ross Finley and Kim Coghill)