SBI - Ecowrap - RBI set to act now, but Fed may not in 2015

The following are the highlights of the report:

As we have anticipated, the US Fed continues to hold its thought for more expectation on economic activities, before any changes in policy stance. This clearly shows uncanny fear of US Fed of a sudden meltdown in fragile economic conditions. Just like June policy it has remained non committal about any possible rate hike in the future. However, now it has assigned more uncertainty emanating from global economy, without pointing out to any specific country (although it is China, as lot of us may not know, slowdown in Canada is also posing threat for US exports).

In particular, with China improving its trade balance with US and at the same time selling US treasury is surely a matter of acute heartburn for the Fed when revision in debt ceiling is just around the corner.

Moreover, it has also shown concern over unwarranted tightness in monetary policy condition by way of strong Dollar and increase in risk perception. Fed has revised down GDP to 2.3% in 2016 (2.5% in June) and 2.2% in 2017 (2.3% in June). PCE Inflation has lowered down to 1.7% in 2016 (1.8% in June) and 1.9% in 2017 (2% from June).

We expect (and as indicated in our various research reports), Fed is slowly moving towards 2016, until settling of global muddles. We expect slightly more cautious guidance doesn't augur well for commodity, dollar and Equity. In effect, if the Fed does not lift in December 2015, or before March 2016, the odds of a rate hike will diminish further.

Now it is time for RBI to take a call on rate cut. All the three conditions as indicated by RBI (to take any action on rate cut) in its last monetary policy statement seems to be fulfilled. Benign food inflation, sufficient transmission of policy rates and spread of normal/excess monsoon over 64% of the country area makes a case for at least 25 bps cut in repo rate. Further, there is a greater acceptance of an extended recovery from the Fed's commentary and figures, with implications for global demand. That doesn't augur well for our recovery too. At last, on margin, the disinflationary pressures that we are currently seeing at wholesale price levels could get worse.

It is better to act now instead for waiting for a situation that will compel us to act. A good policy in good times leads to better results compared to a good policy in bad times.