The Reserve Bank is likely to go for a 25 basis points rate cut in September as price pressures have fallen “notably and far more than expected”, says an HSBC report.
According to the global financial services firm, food prices have been falling across all major sub-groups, across the CPI and WPI measures, both on annual and sequential basis.
Moreover, while rains remain 10 per cent below normal, their impact so far remains “non-disruptive” and fuel inflation has predictably eased off.
“All of these suggest that space for a 25 bps rate cut in the upcoming 29th September policy meeting has opened,” HSBC Chief Economist India Pranjul Bhandari said in a research note.
As per official figures, retail inflation (CPI) slipped to a record low of 3.78 per cent in July, while the wholesale price index-based (WPI) inflation touched a historic low of (—)4.05 per cent.
HSBC, however, noted that there are two risks to its forecast of 25 bps next month.
First, the rupee, which has already depreciated 2.3 per cent against dollar following developments in China, could come under further pressure from a possible Fed lift-off in September. Secondly, a large payback in August inflation reading following the July moderation could keep the RBI from cutting rates in September, it said.
“If the period around the September FOMC meeting remains volatile, the RBI’s rate cut could be pushed to fourth quarter,” HSBC said.
On rupee depreciation, it added that “a sharper pace of depreciation, however, could put the 25 bps rate cut in jeopardy’’.
RBI Governor Raghuram Rajan, in his third bi-monthly policy of the fiscal, left the benchmark lending (repo) rate unchanged at 7.25 per cent as also the cash reserve ratio (CRR) at 4 per cent.
The Reserve Bank of India has already reduced the policy rate by 75 basis points or 0.75 per cent since January.