RBI rate cut unlikely till 2016: Nomura
2 min read 06 Aug 2014, 03:58 PM ISTA rate cut is not likely till the central bank achieves its next target of getting the consumer price index below 6%
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Mumbai: The Reserve Bank of India (RBI) is unlikely to cut interest rates till 2016 as consumer price inflation will ease to the central bank’s comfort levels only by then, Nomura Fixed Income Securities Pvt. Ltd said on Wednesday.
Nomura expects consumer prices to moderate to below 8% by the first quarter of calendar 2015. However, a rate cut is not likely till the central bank achieves its next target of getting the consumer price index (CPI) below 6%, the firm’s India economist Sonal Varma said.
“The RBI was clear in the monetary policy that rates are appropriate if inflation sticks to the current path of 8% by January 2015 and 6% by 2016. In other words, inflation will have to come down below 6% for rates to be eased. We expect rates to be on hold till 2016," Varma said.
On Tuesday, RBI kept its key policy rates unchanged and indicated that it was not ready to relax monetary policy yet, despite an easing of consumer price inflation in recent months.
RBI kept the repo rate, at which it infuses liquidity in the system, at 8%, and the reverse repo rate, at which it drains liquidity from the system, at 7%.
While the decision to hold rates had been expected, the market was taken by surprise by the RBI’s change in focus to bring down inflation further to 6% by January 2016 which meant that a rate cut may be delayed further. Inflation, as measured by the CPI, fell to 7.31% in June from 8.28% in May.
Nomura expects retail inflation to ease to 7.5% by the end of 2014 and further to 6.5% by the end of 2015, only after which period will interest rates come down.
“CPI inflation should moderate over the next two years to under 8% by the first quarter of 2015 and to around 6% by the first quarter of 2016 owing to tighter policies, lower minimum support prices and a gradual moderation in rural wages. However, adverse weather conditions and elevated inflation expectations suggest that the path to disinflation will be bumpy," Nomura said.
However, Varma said India is “at an inflection point" with regards to economic growth. “The trend is positive for India. The slowdown in India’s growth cycle has come to an end. A global growth recovery and de-bottlenecking of investments should revive the capex (capital expenditure) and growth cycle from 2015 onwards," he said.
Nomura expects India’s economic growth to pick up to 6.5% in fiscal 2015-16 from 5% in the current fiscal ending March. Growth could even rise to 7% in 2016-17 if capital expenditure by companies pick up, Nomura said.
Higher growth is also likely to lead to capital inflows which will help the rupee to appreciate gradually. Nomura expects $60-65 billion of dollar inflows this fiscal led by $25 billion to $30 billion of inflows from foreign institutional investors (FIIs) and $20 billion of foreign direct investment (FDI), which will help the rupee rise to 58 per dollar by the end of 2014 and 56.5 per dollar by end of 2015 from 61 per dollar currently.
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