Low CPI inflation makes analysts confident of a cut in rates

Mumbai: Analysts on Tuesday grew more confident of a rate cut by Reserve Bank at the August review, after the headline inflation dipped to a decade low of 2.18 percent for May.

SBI's economic research department said the RBI cannot "avert a rate cut" at the August policy review.

"The expectation of a prominent rate cut would become more pronounced if inflation continues to remain benign for a longer time," it said in a note.

Domestic brokerage Kotak securities said the retail inflation will come below the 2 percent mark for June itself and will be at 4 percent level -- the RBI's medium term target -- in March 2018.

"Stage is set for an August rate cut," it said.

House economists at foreign brokerage Bank of America Merill Lynch concurred, saying, they are "more confident" of a 0.25 percent cut at the third bi-monthly monetary policy review on August 2.

Even though they chose to stick to their calls of a pause, economists at foreign brokerages HSBC and Nomura said chances of a rate cut are higher given the data print.

"Lower inflation and unexciting growth print raises the risk of a rate cut in the RBI's August monetary policy review," HSBC said in a note.

It said the downward trajectory in price rise was due to a slump in food and fuel and added that the last time inflation had fallen so low was in May 2001.

"Our baseline remains a prolonged pause until mid-2018, including at the upcoming August policy meeting, given our view of higher growth and inflation readings as the fiscal year progresses," Nomura said.

However, given the lower inflation number, there is a "40 percent" probability of a rate cut at the August review, it added.

Private sector lender IDFC Bank said even though pressures are building on the monetary policy committee, "an August cut is not a 100 percent given" due to risks like a reversal of base effect and implementation of 7th pay commission allowances, which can push up the number above 4 percent by March 2018.

The RBI, which is mandated to ensure that inflation is at 4 percent in the medium-term, chose to go for a status quo in the rates at its review last week, but also lowered its expectations on inflation by up to 1.40 percent, after the headline number came down to 3 percent in April.

"April inflation print and revised growth estimates have certainly raised difficult policy questions. We will watch carefully over next few months the incoming data on inflation as well as the indicators of real economic activity. I expect that we will remain adequately state contingent and if data so warrant, act for a broader accommodation through the interest rate policy," deputy governor Viral Acharya had told reporters.