Weak Inflation Gives RBI Elbow Room to Cut Rates: Experts

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New Delhi: Weak inflation figures in the country have provided “elbow room” to the Reserve Bank of India to lower rates by 25 basis points this month, say global brokerages.

Financial services majors like HSBC, DBS, Bank of America-Merrill Lynch (BofA-ML) and State Bank of India expect the RBI to go for a 25 basis points rate cut during its policy review meet later this month.

Retail as well as Wholesale Price Index-based inflation dived to new lows in August on falling global commodity prices.

Consumer Price Index-based inflation, which the RBI considers as benchmark, eased to 3.66 per cent in August from 3.69 per cent the previous month, while the one based on WPI tumbled for the 10th straight month to (-)4.95 per cent compared with a provisional (-)4.05 per cent in July.

“These weak inflation numbers give RBI the elbow room to lower rates by 25 bps this month,” DBS said in a note.

“We grow more confident of our September 29, 25 bps RBI rate cut call after August CPI inflation came in at 3.66 per cent and July CPI inflation was revised down to 3.69 per cent from 3.78 per cent earlier,” BofA-ML said in a research note.

It further added that the CPI inflation remains well on track to the RBI’s “under 6 per cent” January 2016 forecast, notwithstanding a second consecutive poor monsoon.

“We continue to believe that the Modi government will use supply-side measures rather than the RBI to fight a rain shock. On balance, we continue to expect the RBI to cut 25 bps each on September 29 and February 2,” BofA-ML said.

According to HSBC, the RBI would certainly carry its share of concerns about weaker than expected monsoon rains, but the central bank will take comfort from the fact that potential counteracting forces exist.

“In sequential annualised terms, both headline and core inflation are running below the RBI’s January 2016 target of 6 per cent, which should give the RBI enough confidence to cut the policy rate by a further 25 bps on September 29,” HSBC said.

Experts, however, said that the only thing that could potentially hold back the RBI is a disruptive reaction to the Federal Reserve’s Federal Open Market Committee (FOMC) meet, scheduled on September 16-17.

“The chances of rate hike by Fed in September are evenly balanced but is now more tilted towards a status quo. We continue to maintain that RBI will go for a 25 bps rate cut on September 29,” SBI Research said in a note.

On the possibility of rate hike by the US central bank, DBS said, “In the remote chance that the US raises rates this week, the RBI might prefer to extend the wait-and-watch stance to allow markets to stabilise and price in further US rate increases, before lowering Indian rates further.”

The RBI, which has lowered rates thrice so far this year by 25 basis points each, is scheduled to hold its next bi-monthly monetary policy review on September 29. However, two of the three rate cuts this year have been announced outside the scheduled reviews.

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