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By Dharamraj Dhutia
MUMBAI (Reuters) - The Reserve Bank of India's rate-cutting cycle could be deeper than expected as downside risks to growth and a benign inflation outlook could prompt the central bank to be more accommodative, economists said.
Growth in Asia's third-largest economy, which is under threat from slowing urban consumption and tepid private investment, could worsen because of the escalating U.S.-China trade war and the spectre of steep U.S. tariffs.
India hopes to seal a trade deal with the United States after President Donald Trump paused "reciprocal" tariffs on dozens of countries, including India, while hiking levies on China.
"With growth below potential, falling oil prices and inflation durably aligned to target, policy rates will need to move into the accommodative zone. Hence, we are lowering our terminal rate forecast to 5.00% from 5.50% earlier," Nomura economists Sonal Varma and Aurodeep Nandi said.
On Wednesday, the RBI cut the key policy repo rate by 25 basis points to 6% and softened its policy stance to "accommodative" from "neutral". The central bank also lowered its growth and inflation forecasts by 20 basis points each to 6.5% and 4%, respectively.
Analysts say the downside on growth and price rise could be larger.
Nomura expects another 100 basis points of rate reductions this year with 25-bp cuts in June, August, October and December.
The tariffs have exacerbated uncertainties but quantifying the impact on growth is difficult, RBI Governor Sanjay Malhotra said on Wednesday.
Dhiraj Nim, an economist at ANZ, expects India's GDP growth for the January-to-March quarter to undershoot the government's 7.6% forecast, warranting an adjustment to the RBI's full-year growth forecast.
"Even if reciprocal tariffs are not considered, the cost to growth from uncertainty and global growth downside can be sizable. I think the RBI is quite optimistic on growth anyway," Nim said, adding if growth falls towards 5.5%, the policy rate could be cut to 5%.
ICICI Securities Primary Dealership said the downside risks to global and domestic growth from trade disruption are likely more severe than estimates.
"Negative growth surprise that pulls down growth to sub-6% could be a more potent trigger for deeper rate cuts to play out," economists Prasanna A. and Abhishek Upadhyay said.
(Reporting by Dharamraj Dhutia; Editing by Mrigank Dhaniwala)
