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'Inflation at 3-yr low unlikely to prod RBI in June'

Last Updated: Tuesday, May 14, 2013 - 20:59

Mumbai: In the backdrop of a sharp fall in the headline inflation readings to the RBI's comfort level of below 5 percent and falling consumer price inflation (CPI), the central bank is unlikely to cut lending rates in the upcoming review next month, research firms said Tuesday.

"Although the cash reserve ratio (CRR) is likely to be lowered by 25 basis points in the June review, we are not looking for the next repo rate reduction until July 30, with another 25 bps cut coming through before the end of the calendar year," a Credit Suisse report said today.

It also said lower inflation numbers might not be the necessary condition for further monetary easing as the central bank would also look at a sustained drop in consumer price inflation along with better external deficit numbers.

"Unfortunately, yesterday's merchandise trade deficit, which jumped to USD 17.8 billion in April, was not exactly helpful in that regard," it said.

Softening food prices pulled down Wholesale Price-based inflation to over three-year low of 4.89 percent in April.

The headline inflation was 5.96 percent in March, while in April 2012, it was 7.50 percent.

Interestingly, consumer price inflation (CPI) also fell to 9.39 percent in April owing to decline in food inflation.

The report also said despite the cautious outlook on inflation by RBI, the near-term risk seems to be less.

"While, in some sense, it is the job of the central bank to worry about inflation, the RBI is likely to be a little red-faced by the degree of caution expressed at its May 3 meeting," it said.

"The central bank is consistently surprised by the weakness of Wholesale Price inflation over the last 6-7 months, while we can't see any trigger for a decisive move in the next few months," it added.

Referring to the rate cut expectation in the upcoming June policy, another research firm Nomura said the RBI was likely to keep the repo rate unchanged in June.

"From a policy perspective, we expect RBI to keep the repo rate unchanged in June as the trade deficit worsened in April and CPI inflation still remains above 9 percent. Instead, we expect a focus on monetary policy transmission through a 25 bps CRR cut. We continue to expect a 50 bps repo rate cut in the second half," Nomura said.

Rating agency, Crisil said despite the fall in inflation numbers, RBI would not opt for sharp easing of monetary policy.

"Despite the decline in both CPI and WPI inflation, we do not expect a sharp easing of monetary policy by the Reserve Bank as it is committed to bringing down and sustaining inflation at around 5.0 percent," the Crisil report said.

Another rating agency Care also said the central bank would take a "wait-and-watch" policy before further easing in monetary policy.

"Besides considering a decline in headline inflation by April 2013, which is now at par with Reserve Bank tolerance threshold, a significantly high retail inflation (although declined to 9.4 percent) still remains a major concern.

"Further, the increase in current account deficit (CAD) continues to pose a major threat as import of gold has increased substantially in April. Hence, the RBI will monitor these numbers along with those on foreign trade before taking a call on rates," Care Ratings said in a report.

Similarly, a HSBC global research report said despite the decline, the space for rate cuts remains limited.

"The room for rate cut remains limited due to lingering inflation risks and the uncomfortably wide current account deficit," the HSBC report said.


First Published: Tuesday, May 14, 2013 - 20:59
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