In the forthcoming mid quarter monetary policy review, RBI is likely to cut repo rate by 25bps, while the possibility of 50bps CRR cut cannot be ruled out. The domestic economy is operating far below potential and lag impact of high interest rates is here to stay. This will keep core inflation under check. Besides, global macro and financial market environment has worsened materially, adding to downside risks related to domestic economy while global commodity prices have softened even in INR terms. In fact, we argue that current elevated interest rates are actually becoming counter-productive. Arguments against rate cut (such as weak INR, stretched CD ratio) are not convincing, in our view.
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