Rate-cut might be possible...

We have just the second monetary-policy-review on February 8, 2017 after the demonetization struck the spending of the economy in terms of consumption and investment and higher unemployment and lower prices have turned the expectations in favor of a rate-cut when the RBI disappointed at the first-one, moreover lower growth expectations following the drive further attach the possibility of a rate-cut when real interest-rate is higher than the central-banks target range 1.25 - 1.50% and the lower inflation in December at 3.41% has increased them by 2.80% when the policy-rate is 6.25%. Higher real-interest rate might adversely affect investment and employment when the economy needs backup from disruptive reforms and is still trying to gain pace from the last rate hike cycle and the nominal interest rate cuts are in still in progress. The commercial banks, it is true that, have reduced rates close to 1% as the deposits increased after demonetization, however there is a gap in the policy-rates and the market-rates, but lower inflation has also increased real-rates when there is demand to lower interest rates and the economy is uncertain on the growth front that how much of it would be shaved-off as the money-supply was hit resulting in lower demand reflected in lower CPI numbers. Lower inflation has resulted in lower nominal rates by the banks, but has also pushed real rates higher which might result in lower demand for loans and investment and might be correlated to lower economic-growth. However, less people at banks and at ATMs show that the demand for cash has been met substantially, which might make us think that demand has been restored to an extent and the government measures through budget might also help lower unemployment that increased after the note-ban, affordable housing and push for better infrastructure might increase employment and lower interest rates would further accelerate the pace of job-growth and economic-growth. Therefore, we might expect that the Monetary-Policy-Committee would take cognizance of higher interest rates and the need to boost private investment spending to further strengthen the growth initiatives by the government to completely bring back the economic-growth that set-down post note-invalidation.