Deutsche Bank expects the Reserve Bank of India (RBI) to cut rates at both the February 7 and April 4 meetings.Kaushik Das, Managing Director and Chief Economist – India, Malaysia, and South Asia at Deutsche Bank expects bond yields to remain stable as the market has already priced in a 50 basis points (bps) rate cut. Yields may decline if expectations of further rate cuts build, though the downside appears limited.The Reserve Bank of India’s Monetary Policy Committee is scheduled to meet from February 5 to 7 this week.
B Prasanna, Head of Global Markets Group at ICICI Bank, noted that while central banks typically avoid cutting rates when the currency is depreciating, the current depreciation is part of a broader global trend driven by a strengthening US dollar rather than India’s weak current account deficit (CAD).These are the edited excerpts of the interview.Q: Do you think the uncertainty can impact RBI decision-making in a big way?Prasanna: Yes, markets being markets, Budget is already history, and within a day, we have got so much of information that markets are now reacting to other kinds of movements. Yes, the uncertainty is increased to some extent. All of us in the markets were expecting some kind of announcements from Trump on the day he was taking charge as President, or in the first one or two days through executive orders.But the kind of bonhomie that was there between him and the other presidents got some complacency into the international, global markets again, basically with the view that Trump might not go all the way, but clearly what has come yesterday has surprised the markets – I would say a little bit on the shock also, and the fact that it’s not just announcements, but they’re going to start collecting tariffs from tomorrow. So the natural reaction for currencies would be to depreciate, the non-dollar currencies will depreciate against the US. And what’s happening in INR is also more of the same.Also Read | Gautam Duggad’s biggest post-Budget betsAs far as your question on RBI is concerned, I would say that in a normal situation, maybe RBI would not be cutting rates when the currency is depreciating, but what is happening right now is a part of a global move where the dollar is strengthening and all the other currencies are depreciating. It is not because India’s current account deficit (CAD) is weak.It is only India’s balance of payments (BoP) are weak only because of the capital flows, which means if you cut rates and can get better earnings on the corporate side, you can get better growth, and hence, hopefully a better flows going forward. So I don’t think it derails the rate cut, but at the same time, I would also have to admit that the uncertainty is killing. We will have to see what the RBI does.Q: At the moment, what are the odds therefore, for a rate cut?Prasanna: We are not out of the woods as far as the global dollar strength is concerned. We need to see it playing out, and I don’t see international investors returning to India in a hurry. Unfortunately, while the Budget is very good, and it is played within all the parameters of fiscal conservatism, while at the same time putting consumption, not compromising on capital expenditure.
But the thing is, it has to start reflecting into corporate earnings, into India, which will take maybe a couple of quarters, and the dollar strength will have to play its course, and we will have to see it peaking, and then only international investors will even start looking at the rest of the investing asset classes.Q: Do you think that, given the kind of noises the Budget has made, push the pedal on consumption. Are you changing your growth forecast at all for next year?Das: We already have a growth forecast of 6.5% for next year – 2025-26 (FY26), which is somewhere in between 6.3% and 6.8% which the economic survey has indicated. So we don’t need to change that forecast. But the point is that 6.5% growth is probably below the potential growth rate of the economy, and this year also we are supposed to get something in between 6% and 6.4%. So you need some support.Now the point is, the Budget has done the maximum that it could do given the fiscal space. Beyond that, we should not have expected more. But then I have always maintained two things. One is, that you cannot depend solely on the fiscal to support growth, given that they have to keep on consolidating. Therefore, monetary policy has to play a bigger role. RBI has been on hold for 24 months when the maximum in the past has been 11 months of a wait period. So we are already late, and RBI has started these liquidity easing measures, which will help, but they need to do more.Also Read | Decoding Budget Arithmetic: Dr. Rathin Roy reflects on the 2025 BudgetRate cuts – there is no point delaying it because today you have this uncertainty because of US tariffs. If you decide to wait and go in April, even in the first week of April, you could have the same uncertainty. And you could keep on delaying this. So the second important point is that you cannot link interest rate and Fx policy at this point in time. Fx has to have its own course. It should be the risk absorber objective.So if the rupee has to depreciate because globally dollar is strong, that should be the path. RBI can modulate that move. But it cannot use the interest rate policy as a defence for the Fx policy, the interest rate policy should focus more on the domestic fundamentals, and over there, we think some bit of rate cuts are required in February and April, along with liquidity easing measures.Q: What is the in-house view on the dollar, rupee? Are we at the low like 87.5 thereabouts, and what kind of a bond yield range are you looking at? You are factoring in two cuts.Das: One is dollar rupee this year you will see more two-way movement. It’s not like now rupee is under pressure, it will depreciate, but there is a point of time when DXY will also peak, and you will see other currencies appreciating when all this fear factor is over. At that time, RBI will allow INR to appreciate as well, compared to the last few years, when INR never used to appreciate started depreciating.taking all that into consideration, the rupee could be at 88 by the end of this year. So it could move to 88 first, and then you could see an appreciation at some point, back to 86.5 and then again, go back to 88. So I would say 88 would be the range for the rupee going forward.As far as bond yields and interest rates are concerned. Just to add a little bit more on liquidity – I feel that RBI will not be cutting the cash reserve ratio (CRR) anymore. They have done it already in December, beyond 4% they would not like to move, as Prasanna says, this is not a crisis-like scenario. They can do more, buy/sell swap, another 5 billion. They can do more OMO purchases. And once they have started open-market-operation (OMO) purchases already, it will be about ₹90,000 crore this year, and maybe more this fiscal year and more would be coming in the next fiscal year.I would assume more VRR, more OMO, more FX swap, but not CRR at this stage. And if you have seen carefully that the 56-day VRR is supposed to happen from February 7, that is the day when RBI – if it delivers a rate cut, people would be willing to take that money. And you will see that the 56th day falls on the next policy on April 4 – the rollover period. So, I would expect two rate cuts on February 7 and April 4, coinciding with the 56-day VRR rollout.Bond yields probably would be somewhere around the same levels, because the market has already priced in 50 basis points (bps) rate cut. If there are more expectations of rate cut going forward then you could see bond yields falling more than where we are, but more or less, we are at that level. But the negative side is also not that much.For the full interview, watch the accompanying videoCatch all the latest updates from the stock market here
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