RBI - Early next year, expect repo rate cut... ::ICICI Securities, link

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Early next year, expect repo rate cut...
The RBI maintained status quo with no change in rates as expected,
saying a change of stance would be premature at this juncture. However,
with softening inflation at 5.5%, the RBI has indicated a possible change
of stance early next year or even outside the policy preview cycle. Hence,
we expect the repo rate cut to take place in Q4FY15.
Key policy statements….
ƒ Repo rate kept unchanged at 8% with CRR and SLR unchanged at
4% and 22%, respectively
ƒ Projection of GDP growth for FY15 retained at 5.5% with a gradual
pick-up in momentum through 2015-16 on the assumption of a
normal monsoon and no adverse supply/financial shocks
ƒ CPI inflation forecast has been revised down to 6% for March 2015
Policy rationale
With deposit mobilisation outpacing credit growth and currency demand
remaining subdued in relation to past trends, the banks are flush with
funds, leading a number of banks to reduce their deposit rates.
“Some easing of monetary conditions has already taken place. The
weighted average call rates as well as long term yields for government
and high-quality corporate issuances have moderated substantially since
end-August. However, these interest rate impulses have yet to be
transmitted by banks into lower lending rates. Indeed, slow bank credit
growth is mirrored by increasing reliance of large corporations on
commercial paper and domestic as well as external public issuances”
“Subsequent policy actions will be consistent with the changed stance.
There is still some uncertainty about the evolution of base effects in
inflation, the strength of the ongoing disinflationary impulses, the pace of
change of the public’s inflationary expectations, as well as the success of
the government’s efforts to hit deficit targets. A change in the monetary
policy stance at the current juncture is premature. However, if the current
inflation momentum and changes in inflationary expectations continue,
and fiscal developments are encouraging, a change in the monetary
policy stance is likely early next year, including outside the policy review
cycle”
Our view
We believe the policy clearly states that inflation risks are balanced now
and current CPI levels are below its January 2015 target of 8% and also
below January 2016 target of 6%. Though from December unfavourable
base effect is expected for CPI, for next 12 months CPI is expected to
hover around 6%. RBI has revised its target down to 6% by March 2015.
We expect a rate cut of 25 bps in February 2015 policy or even a pre
policy action.

LINK
http://content.icicidirect.com/mailimages/IDirect_RBIActions_Dec14.pdf