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Business News/ Market / Stock-market-news/  Surprise fall in inflation completes rate jigsaw puzzle; 25 bps cut expected
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Surprise fall in inflation completes rate jigsaw puzzle; 25 bps cut expected

Economists believe that it will be tough for RBI not to cut rates when it meets on 5 April for the first monetary policy review of the new fiscal year

Photo: ReutersPremium
Photo: Reuters

Mumbai: First came the government’s promise to stick to a fiscal deficit of 3.5% of gross domestic product (GDP) for next year. Then came the Reserve Bank of India (RBI) governor’s comment that the central bank is reassured by the fiscal target. This was followed by a third consecutive negative reading on the index for industrial production (IIP). And now the unexpected fall in inflation in February which pulled down inflation measured by the consumer price index (CPI) to 5.18%

Economists believe that the key pieces of the rate jigsaw puzzle are now all in place and the final image that emerges is one of a 25 basis points (bps) rate cut in RBI’s April policy. One basis point is one-hundredth of a percentage point. Markets have been hoping for one ever since the budget and were mildly disappointed that the central bank didn’t oblige with an off-cycle rate cut. But with inflation slowing to a four-month low in February, economists believe that it will be tough for RBI not to cut rates when it meets on 5 April for the first monetary policy review of the new fiscal year.

Here’s what economists said in their post-inflation analysis on Monday:

Indranil Pan, chief economist, IDFC Ltd

With the government showing fiscal restraint, the market had been expecting RBI to cut repo rate ahead of the policy. However, RBI did not reduce rates—we believe due to the surprise rise in the headline CPI in the January reading. The latest reading being positively surprising on the lower side, some room for RBI to cut the repo rate has again opened up. Our trajectory indicates headline CPI inflation to fall to 5% in March 2016 and then remain in a sub-5% zone for most part of the year under normal assumptions. The risk to our inflation estimate comes from implications of the 7th Pay Commission on various components (including housing), but RBI is likely to look through some of these noises. We expect RBI to reduce repo by 25 bps in April 2016 and condition future cuts on data, such as monsoons, Pay Commission-related demand rise and global conditions.

Shubhada Rao, chief economist, YES Bank

After having comfortably achieved RBI’s 6% inflation target in January, the lower-than-expected CPI print for February released today is an additional reassurance that general inflation momentum remains subdued. This, in combination with the RBI’s pronouncement of confidence in the Union budget and the government’s re-initiation of the reform process, strengthens our base case for an inter-meeting 25 bps repo rate cut, with an emerging likelihood of a 50 bps rate cut instead. The monetary policy space would become limited thereon, as the 5% inflation target for end-FY17 comes further into focus.

Soumya Kanti Ghosh, chief economic advisor, SBI

The inflation outlook and trajectory of inflation is proceeding on expected lines. Also, another spell of unseasonal rains will not have any material impact on rabi harvest. This may not affect the future inflation outlook, thus giving enough accommodation for at least a 50 bps rate cut, if not even more, by RBI. We will be happy if it comes through in March, giving some respite to the beleaguered banking space.

D.K. Joshi, chief economist, Crisil

After five months of steady rise, CPI inflation dropped to 5.2% in February from 5.7% in January, making the case stronger for another repo rate cut by RBI. The budget’s focus on fiscal consolidation had already created conditions for RBI to cut rates; we expect the policy rate to be sliced by 25-50 bps in 2016. A benign inflation climate further allows for this; CPI inflation, we believe, will stay soft at 5% average, unchanged from our estimate for fiscal 2016, if India is blessed with a normal monsoon. Given the excess industrial capacity, weak demand and soft commodity and crude oil prices, the impending Seventh Pay Commission payouts are unlikely to swing inflation away from RBI’s glide path.

Pranjul Bhandari, chief India economist, HSBC

Inflation surprised on the downside in February as food prices, particularly vegetables, corrected after a month’s delay. The trajectory of food inflation from here depends squarely on weather conditions improving through the summer months, given low water storage levels in reservoirs. On the positive side, international weather offices expect El Nino conditions to recede, which in turn could improve monsoon rains. Still, sticky high core inflation seen across various inflation measures (CPI, WPI and PMI prices) needs careful monitoring. For the time being, a disciplined fiscal stance, larger-than-expected decline in IIP and a drop in CPI inflation have converged, and we continue to expect that RBI will cut the policy repo rate by 25 bps to 6.5% at its upcoming policy meeting on 5 April.

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Published: 15 Mar 2016, 09:57 AM IST
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