RBI likely to cut policy rates in June, say experts

Falling inflation may be the trigger

RBI likely to cut policy rates in June, say experts

Taking cue from the continued downward trend in inflation and sluggish growth indicators, the Reserve Bank of India (RBI) is likely to go for further monetary easing in its June 17 policy meet, global investment banking firms said.

The headline wholesale inflation fell to 41-month low in April (4.89 per cent), dropping within the central bank’s comfort zone of less than 5 per cent and fuelling market hopes of more monetary easing to revive sagging economic growth.

“We believe the WPI inflation report provides ample room for the RBI to cut policy rates at its June 17 policy meeting,” Barclays said in a research note and added: “We expect the repo rate to be cut to 7 per cent (another 25 basis points cut) by mid-2013. Moreover, we think the likelihood of further rate cuts (another 50 basis points to 6.50 per cent) in the second half of 2013 has risen significantly”.

The RBI is scheduled to announce mid-quarter review of monetary policy for 2013-14 on June 17.

According to HSBC Chief Economist for India & ASEAN, Leif Lybecker Eskesen, “The inflation picture is clearly improving, which has increased the chance that the RBI will ease again”.

However, Eskesen further noted that “the room for rate cuts is limited due to elevated inflation expectations and the wide current account deficit.” The growth challenges instead primarily have to be tackled through a heavy dose of reforms, which can lift the structural constraints on growth.

Echoing similar sentiments, Morgan Stanley in a research note said, “We expect the Reserve Bank of India to cut policy rates by a further 25-50 bps (0.25-0.50 per cent) by end FY2014 and market oriented interest rates to decline by 100 bps (1 per cent)”.
Bank of America Merrill Lynch said: “We have added a second 25 basis points (0.25 per cent) RBI rate cut on July 30 after the one on June 17 to revive growth after April Wholesale Price Index inflation dropped to 4.9 per cent.”

Meanwhile, the RBI has also said it would take into account falling inflation while deciding on policy initiative in its review next month.

“We certainly will take note of the softening of inflation and the external payments situation in the next mid-quarter policy statement on June 17,” RBI governor D Subbarao said last week.  

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