 "As inflation rates slide, hopes for RBI rate cuts brighten")
With retail inflation dropping more than expected in September and the likelihood that it may drop further in the next two months, observers have advanced their projections on a policy rate cut by the Reserve Bank of India (RBI).
There is a drop in momentum on food price rise, apart from a cut expected in diesel prices.
RBI Governor Raghuram Rajan had set a target of eight per cent inflation in the consumer price index (CPI) for January 2015 and six per cent for January 2016. As a result, many weren’t expecting any rate cut for quite a while. However, after the lower-than-expected CPI data, yields on government bonds opened lower by seven basis points (bps) on Tuesday, though these corrected later to close the day at 8.4 per cent as compared to Monday’s closing at 8.42 per cent.
After raising interest rates thrice between September 2013 and January 2014, RBI kept it unchanged in the past four policy reviews. While this pause is likely to continue in December, many believe that in the February 2015 review, the sixth and last bi-monthly one of this financial year, the central bank will start reducing policy rates.
“We grow more confident that Rajan will cut policy rates from February, after September CPI-based inflation eased to a lower than expected 6.46 per cent from 7.8 per cent last month,” said Bank of America Merrill Lynch (BofAML), in a report to its clients. September CPI-based inflation was the lowest since the government started releasing the data in January 2012.
The prices of vegetables and some other foods, a worry for policymakers, have actually declined on a monthly basis and could stay flat during the winter, if not fall further, experts said. If food prices stay flat, a further decline in energy prices will have a favourable impact on headline inflation.
“We see a higher probability of CPI reaching the six per cent target (set for January 2016 by RBI) in mid-2015, versus our earlier expectation of Q1 2016,” Nomura said. It gave a 20 per cent probability of a rate cut in the second half of 2015, though it kept its baseline projection of a pause in 2015 and rate cuts in 2016.
One factor that could go against a rate cut is that the decline in vegetable prices might not be sustained. In addition, there is concern that if the US Federal Reserve starts raising rates, this could impact inflows into India. Also, as growth starts picking up, any process of disinflation could be slower.
There is a drop in momentum on food price rise, apart from a cut expected in diesel prices.
RBI Governor Raghuram Rajan had set a target of eight per cent inflation in the consumer price index (CPI) for January 2015 and six per cent for January 2016. As a result, many weren’t expecting any rate cut for quite a while. However, after the lower-than-expected CPI data, yields on government bonds opened lower by seven basis points (bps) on Tuesday, though these corrected later to close the day at 8.4 per cent as compared to Monday’s closing at 8.42 per cent.
After raising interest rates thrice between September 2013 and January 2014, RBI kept it unchanged in the past four policy reviews. While this pause is likely to continue in December, many believe that in the February 2015 review, the sixth and last bi-monthly one of this financial year, the central bank will start reducing policy rates.
“We grow more confident that Rajan will cut policy rates from February, after September CPI-based inflation eased to a lower than expected 6.46 per cent from 7.8 per cent last month,” said Bank of America Merrill Lynch (BofAML), in a report to its clients. September CPI-based inflation was the lowest since the government started releasing the data in January 2012.
The prices of vegetables and some other foods, a worry for policymakers, have actually declined on a monthly basis and could stay flat during the winter, if not fall further, experts said. If food prices stay flat, a further decline in energy prices will have a favourable impact on headline inflation.
“We see a higher probability of CPI reaching the six per cent target (set for January 2016 by RBI) in mid-2015, versus our earlier expectation of Q1 2016,” Nomura said. It gave a 20 per cent probability of a rate cut in the second half of 2015, though it kept its baseline projection of a pause in 2015 and rate cuts in 2016.
One factor that could go against a rate cut is that the decline in vegetable prices might not be sustained. In addition, there is concern that if the US Federal Reserve starts raising rates, this could impact inflows into India. Also, as growth starts picking up, any process of disinflation could be slower.