Most analysts see end of rate cuts for the year, a few differ

Mumbai: Most analysts at ratings agencies and foreign brokerages described the 25 bps rate cut by the RBI on Wednesday as expected and ruled out any such action through the course of the year, saying the present low inflation print is not sustainable.

"The Monetary Policy Committee has reiterated its focus to maintain medium-term inflation at 4 percent and therefore has maintained its neutral monetary policy stance, though it is now more comfortable with the inflation trajectory since several upside risks have reduced or not materialised," Crisil said in a note.

Describing the rate cut in line with its expectation, Crisil said "The timing was opportune since inflation has dipped to record lows and is only likely to rise gradually hereon. But we do not expect any further reduction in the repo rate this fiscal and expect a prolonged pause from here."

It noted that for the first quarter, CPI averaged 2.2 percent, which is closer to the lower bound of the MPC's forecast (2-3.5 percent) for the first half. For the second half, it forecast inflation of around 3.5-4.5 percent.

The recent dip in inflation was accentuated by demonetisation-led crimp in demand and seasonal downside pressures on food, most of which are temporary and will soon fade, the rating agency warned.

Japanese brokerage Nomura said overall, the rate decision and its neutral stance were in line with expectations. The neutral stance suggests that the RBI's decision-making remains data-dependent.

"Headline inflation bottomed in June but we expect it to rise gradually to above the medium-term target of 4 percent on higher food prices and statistical factors like HRA hike, adverse base effects. Given our expectation of both growth and inflation rising over the next six to 12 months, we expect a prolonged pause from the RBI," Nomura said.

Singaporean brokerage DBS said the neutral policy stance shows that the RBI remains fixated on the inflation outlook, rightly so given its central mandate, rather than being burdened by other considerations, which include supporting growth and financial stability.

Looking ahead, given the disinflationary pressures in core inflation and ongoing structural corrective steps in food management suggest inflation is likely to stabilise around 4 percent from two-three quarters from now, it said.

Describing the rate action as expected, Icra said at the current level repo rate, it doesn't expect the monetary policy stance to be revised to be accommodative from neutral, unless the baseline inflation projection for 6-12 months ahead eases below 4 percent, which looks unlikely and thus reducing likelihood of further rate cuts this year.

However, SBI Research said it expects more rate cuts in the year such as increased focus of the MPC on growth, which is a signal of more cuts going ahead; focus on fall in real neutral rates which in Q4 of FY15 was 0.6-3.1 percent but is now trending at 1.25 percent given the weak growth.

Similarly, American brokerage BofA-ML said it continues to believe that MPC to cut rates by a final 25 bps in

the December 6 policy, on weak growth and low inflation, after today's more-than-expected dovish policy.

"We continue to see three compelling factors for another RBI cut. Inflation risks are overdone: we track July inflation at 2 percent (excluding HRA impact), even after a tomato price hike and average FY18 inflation at 3.7 percent.

"Second, the output gap is unlikely to close any time soon, with high lending rates delaying recovery. Finally, imported inflation risks are receding, with oil prices coming off and a softer dollar," BofA-ML said.