RBI to maintain 'prolonged pause' before next rate cut: HSBC

Inflation numbers have risen as expected and the Reserve Bank will go in for a "prolonged pause" before cutting rates again, said a brokerage report.

"We expect the RBI to be on a prolonged pause from here onwards with the risk of a 0.25% rate cut (to our assumption) by the year-end if retail inflation undershoots the 4% target by a comfortable margin," economists at British brokerage HSBC said in a note on Wednesday.

The note comes two days after data showed that headline consumer price inflation (CPI) almost doubled to 2.36% for July from 1.54% in the previous month, and a day after the wholesale price inflation also shot up to 1.54% from being negative in the previous month.

The brokerage attributed the jump in inflation numbers to rising vegetable prices, but underlined that core inflation excluding food, fuel ticked up after moderating for three straight months.

The housing index also rose to 5% from 4.7% in June, partly reflecting one-sixth of the impact of the Seventh Pay Commission-mandated housing rent allowance (HRA), the report said.

"We expect the HRA impact to show up further over the next six months. Thankfully, the RBI has mentioned that it will overlook this direct statistical impact of HRA, so prima facie, the rise in core inflation is nothing to worry about," it said, adding the impact from HRA was only 0.1% to the overall number.

Pointing out to the jump in the core inflation, the brokerage said it is not just core inflation that pushed up the number. The GST rollout also had some impact on the inflation print, it said and pointed to the increase in tobacco prices.

"Looking through the short term noise created by policy changes, we believe that underlying inflation is at 4%. Another way of saying this is that the RBI has met its inflation target of 4% in record time."

It can be noted that under the inflation targeting framework, the central bank is tasked with getting the price rise down to 4% in the medium-term. With the signs of inflation ebbing to its comfort, it cut its key rates by 0.25% at the last policy review while maintaining its neutral stance on policy.