RBI unlikely to cut rates despite fall in inflation, say analysts

Even though the headline retail inflation has eased to a five-year low of 6.5 per cent in September, analysts on Tuesday said the Reserve Bank of India (RBI) is unlikely to cut its key rates in the remaining period this fiscal.

"We believe that the RBI will remain on hold for the rest of this fiscal," ratings agency Crisil said in a note, citing factors like the continuing upward risks to the 6 per cent target for January 2016 that will make a rate reduction difficult.

Additionally, another restricting factor will be the implementation of a new monetary policy framework as suggested by the Urijit Patel committee, Crisil added.

Singapore-based brokerage firm DBS said the pressure is likely to build on RBI for a cut, "but the central bank is unlikely to shed its cautious stance as yet" and RBI Governor Raghuram Rajan will "look through these swings" in the inflation numbers.

Analysts attributed the lower figures of inflation in September, at a low of 6.5 per cent, to the base effect, something which Rajan had alluded to in his previous monetary policy statement.

As for the trajectory in the future, they said apart from the high base, the ongoing correction in the global crude prices will also help ease inflation.

However, Japanese brokerage Nomura said there are "downside risks" to the RBI's January 2016 forecast on CPI, and added the number shall touch 6 per cent by mid-2015, much ahead of the targeted January 2016.

Similarly analysts at Bank of America-Merill Lynch also said that it expected the RBI Governor to hold rates at the December 2 policy announcement and cut them in February.

"We grow more confident that Governor Rajan will cut policy rates from February after CPI eased in September," BofA-ML analysts said in a note.

With official data released on Tuesday saying that inflation measured by wholesale prices dropped to a five-year low of 2.7 per cent in September, analysts at Citi said the upside risks to the 6 percent CPI target have "subsided materially".

Citi said the benign outlook on global commodities, stability in the rupee, drop in core CPI and supply side efforts to contain food inflation made it confident on the inflation outlook.

In the past, Rajan, who has hiked rates thrice since September 2013 and continues to hold it at an elevated 8 per cent levels despite pressure from the pro-growth lobby, has said he prefers not to wage repeated battles on inflation and wants to fight it once for all.

RBI, which has maintained status quo in interest rate since January, will review its monetary policy on December 2.

The central bank primarily factors in the retail inflation while framing the monetary policy. It is targeting 8 per cent retail inflation by January 2015 and 6 per cent by January 2016.

Falling food prices have pulled down the September retail inflation to 6.46 per cent, the lowest since the country started releasing the Consumer Price Index (CPI) in January 2012.

Finance Minister Arun Jaitley also said fiscal consolidation and a new monetary policy framework would help bring down inflationary expectations.

The government is working on a new monetary policy framework under which it will fix the inflation target for the Reserve Bank to achieve.

In its comment, Ficci said the decline in inflation is getting broad based and indicates inflationary pressures waning as of now.

"... The prices are expected to remain moderate. CPI inflation is moving in consonance with RBI?s target rate and this should bring in some breathing space," the industry body said.

Diesel and petrol prices are likely to come down in the coming days in the wake of sliding global crude prices, which is expected to further ease inflationary pressure.

The WPI data further revealed that inflation in milk, eggs, meat and fish continued to decline in September as well.

However, there was a slight increase in the prices of fruits during the period.

Inflation in manufactured products, like sugar, edible oils, beverages and cement also fell to 2.84 per cent in September as against 3.45 per cent in the previous month.