RBI rate cut imminent, question is 25 or 50 bps

Come Wednesday, December 7 all eyes would be glued to the TV sets as to what the Monetary Policy Committee (MPC) headed by RBI Governor, Urjit Patel will declare in its second bi-monthly monetary policy review post a tectonic shift in the economic scenario of the country in the wake of demonetisation.

It has been widely expected that the Reserve Bank would go in for a rate cut, but it is not clear whether it will be a 25 or 50 bps cut.

RBI policy holds great significance as this will be the first monetary policy review after demonetisation of old Rs 500 and Rs 1,000 banknotes, following which banks witnessed a surge in deposits leading to excess liquidity into the banking system.

However, as per the estimates of most of the bankers and analysts MPC is most likely to go for a 25-bps point cut. Markets seems to have anticipated a 25-bps cut in interest rates to stand at 6 per cent, which would make it the lowest rate in six- years.

There is also a view that the central bank may go for a higher cut of 50-bps which would be deemed to be a surprise and may spring the markets upwards as the real cost of funds would drastically come down given the large amount of deposits banks possess post the demonetisation drive.

Key things to be watched out would be RBI’s statement with respect to printing of currency notes and managing liquidity in the banking system.