RBI likely to cut rates again by 2017-end: Chris Wood of CLSA

STOCK MARKET - There is more room for the Reserve Bank of India (RBI) to cut rates even after the recent 25 basis point (bps) cut earlier this week, and it is likely that the central bank will do so one more time before the end of calendar year 2017 (CY17) given the high real interest rates in India, writes Christopher Wood, managing director and equity strategist at CLSA in his weekly note, GREED & fear.

The real interest rate in India (difference between the yield on risk-free sovereign treasury-bill and the headline CPI) stands at around 4.7%, is also the reason why the rupee has remained strong, Wood notes.

Recently, the largest state-owned bank, State Bank of India (SBI) cut interest rates on savings bank deposits by a 50 bps citing high real interest rates. It introduced a two-tier interest rate structure on savings bank deposits. With effect from July 2017, a savings bank balance of over Rs 1 crore will earn an interest rate of 4% per annum (p.a.), while the ones with Rs 1 crore or less will earn an interest rate of Rs 3.5% p.a.

Markets, especially the banking stocks, gave a thumbs down to the RBI’s move to cut the repo rate by just 25 bps earlier this week – the first cut since October 2016 – making it the first Asian central bank to do so thus far in calendar year 2017 (CY17).

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