RBI may cut repo rate by 0.25% in February: HSBC report

Mumbai: With uncertanity over implementation of GST, rising crude oil prices and the challenging 4 percent CPI in medium term, Reserve Bank may cut repo rate for the final time by a 25 basis points in the February policy, says a report.

"We hold on to our expectation of a 25 basis points rate cut in February, but caution that this would likely bring the easing cycle to an end, given the pressures in the horizon; implementation of the GST bill, rising oil prices, implementation of government employees housing allowance, and the challenging 4 per cent CPI target for the medium term," HSBC said in a report today.

RBI has set an objective for achieving consumer price index (CPI) inflation at 5 percent by the third quarter of the financial year 2016-17 and the medium-term target of 4 percent within a band of +/- 2 percent.

Retail inflaion eased to 3.41 percent in December, which is a 25-month low as against 3.63 percent in November.

The report said the RBI will meet its 5 percent CPI target for March comfortably.

HSBC said since demonetization, high frequency food data has been moderating.

"As such, we are not surprised to see both a y-o-y and m-o-m non-seasonally adjusted fall in December prices. Vegetables, pulses and fruits led the charge," it said.

The November Index of Industrial Production (IIP) rose to 13-month high of 5.7 percent compared to the contraction of 1.9 percent in October.

The report said the numbers need to be interpreted with care as the IIP series tend to undergo sharp revisions as more companies report production activity and subsequent revisions could well be downward.

"Also, much of the pain following demonetization is likely to show up in upcoming months," it said.

The HSBC report said on the back of the ongoing cash crunch (still a 40 percent contraction in effective currency in circulation), it expects GDP to grow 5 percent y-o-y in the October-December quarter and 6 percent y-o-y in the January-March quarter.

"We expect growth to normalize gradually towards the 7 percent ballpark, but remain shy of the 7.5-8 percent range in the financial year 2017-18, due to adjustment costs that businesses and consumers face, in the process of formalization and digitization," the report said.