RBI likely to cut rates by 25 bps in FY17 : Report

The central government has budgeted extremely low capex growth for the current fiscal as compared to the previous year

The Reserve Bank may slash interest rates up to 25 basis points in the current financial year hinging on the possibility that inflation will continue to remain high even if monsoons are normal, says a report.

As per estimates by financial services and investment research firm Ambit Capital, the CPI inflation is expected to average at an estimated 5.8% year-on-year in the current fiscal, which is higher that the RBI's projection of about 5%.

"We expect room for rate cuts to be limited owing to two reasons - there is a high likelihood that inflation remains sticky at 4.5-5.5% in 2016-17 even if monsoons are normal," Ambit said.

Also, "it would make sense for the RBI to signal to the central government (by not cutting rates) that its fiscal maths appears overly ambitious", it added.

The firm said it expects rate cuts to the tune of 0-25 bps in the rest of the ongoing fiscal.

"Our modelling process suggests that CPI inflations will average at an estimated 5.8% year-on-year in financial year 2016-17 which is higher than the RBI's projection of about 5% year-on-year by end of the current fiscal," Ambit said.

Besides noting that the central government has budgeted extremely low capex growth for the current fiscal as compared to the previous, Ambit said the analysis of the top 50 listed private companies' capex plans suggested that the private sector will be cutting back on capex quite meaningfully for the same period.

"A series of signals now suggest that the record influx of private equity/venture capital funds that India received over the last few years is likely to abate significantly in the current calendar year," it said.