Falling commodities give RBI room to cut rates, say analysts

Brokerages Bank of America-Merrill Lynch and Nomura too are expecting a 25 bsp repo cut.

Mumbai: Ahead of the annual monetary policy announcement on Friday, analysts are calling for lower interest rates.

"Based on a relatively more benign outlook for inflation and the current account deficit following the recent moderation in commodity prices, as well as the continuing sluggishness in investment activity and domestic consumption sentiment, we expect Reserve Bank to reduce short-term lending rate by 25 bps on Friday," domestic rating agency Icra said.

"Given the moderation in prices of some industrial inputs and weakening pricing power, we expect core inflation to remain moderate at 3.5-4 percent over the first half of the fiscal, unless demand pressures resurface. However, consumer inflation is a challenge and is likely to tread at 10 percent levels," Icra said in a report.

Brokerages Bank of America-Merrill Lynch and Nomura too are expecting a 25 bsp repo cut.

"We expect RBI to cut policy rates 25 bps on Friday to revive growth. Second, it will still likely continue to caution that the room for further rate cuts is limited with inflation set to go up in H2 on diesel price and electricity tariff hikes," BofA-ML India chief economist Indranil Sen Gupta said in a note.

It said it expects banks to follow the suit with a similar cut in their lending rates, and RBI will slash rates by another 75 bps through the fiscal -- in June, October and January -- as it expects core inflation to persist at 4 percent levels.

Nomura too expects a 25 bps repo rate cut. "We expect the RBI to cut its repo rate by 25 bps on lower inflation (80 bps below the RBI projection in March), continued weak growth and narrower trade deficit collectively creating space for further easing," Nomura India chief economist Sonal Verma said.