‘Another 50 bps of repo rate cut in first half likely’

The ongoing slowdown in inflation momentum has given room for the Reserve Bank of India to adopt a more accommodative monetary policy and cut policy rates by 50 basis points in the first half of this year.

According to global brokerage firms like Bank of America Merrill Lynch, Barclays, Citigroup and HSBC, inflation is likely to stay “benign” through the year 2015.

Even though monsoon is likely to be a risk factor, inflation is likely to stay “softer” on account of lower commodity prices, they said.

“With inflation declining consistently and given the slack in the economy according to the RBI’s industrial survey, we continue to see room for the RBI to lower policy rates in the first half of 2015,” Barclays said in a research note, adding “we maintain our forecast of another 50 bps of repo rate cuts in the first half of 2015.”

Wholesale inflation turned negative for the second time in three months as fall in petroleum and food prices dragged it to a five-and-a-half year low of (—) 0.39 per cent in January.

Retail inflation moved up to 5.11 per cent in January month-on-month, measured on a new base year 2012, mainly due to dearer food items, including fruits and vegetables.

According to experts, the ongoing slowdown in inflation momentum and recent policy guidance from the central bank have reinforced the expectation of a more accommodative monetary policy stance.

HSBC in a research note said: “We expect the central bank to cut the policy repo rate by 25 bps in March/ April, followed by a final 25 bps rate cut in June.’’

BofA-ML in a research note said that the RBI Governor, Raghuram Rajan, is expected to cut the policy rates by 25 bps on April 7 and in June with the Budget expected to meet the fiscal consolidation target and benign inflation.

After markets factor in the expected Fed rate hike in September, RBI is expected to cut another 50 basis points in early 2016, BofA-ML added.

Citigroup in a research note said it “currently” maintains its view of a cumulative 75 bps easing on benign inflation, and expectation that the February Budget would reinforce fiscal consolidation but it is awaiting RBI’s interpretation of the GDP data/output gap for further clarity.

There is a clamour for rate cuts in a bid to boost demand and revive industrial growth after WPI inflation turned negative for the second time in three months.

The RBI Governor, Raghuram Rajan, in the monetary policy review earlier this month, had kept the key interest rate unchanged saying the apex bank wanted more comfort on inflation front as it awaited cues from Finance Minister Arun Jaitley’s first full-year Budget.