Lower core inflation may prompt RBI to ease rates: Analyts

Analysts and economists on Thursday said headline inflation at 7.55 percent for May is in line with their estimates and opined that decline in core inflation may prod the Reserve Bank to cut rates by 0.25 percent in the forthcoming mid-quarter policy announcement next Monday.

 

"Declining core inflation and demand contraction will weigh heavily on RBI's monetary policy action on June 18 and odds are tilted in favour of the central bank focusing towards growth enhancing measures," rating agency Fitch director DK Pant said.

 

The inflation number is in line with market expectations and the core or non-food manufactured products inflation has been contained under 5 percent, a note from British bank Barclays said.

 

"Today's inflation print, though not visibly low, has paved the way for one more round of RBI easing next week, in our view," it says, adding it expects a 25 bps cut in rates. In a note, rating agency Crisil said even though the inflationary pressures continue to be high, RBI can cut rates to lower the cost of credit and reviving business sentiments in the prevailing scenario of weak growth.

 

However, Crisil cautioned that food inflation, which remained at 10.74 percent in May, could go up further if the minimum support prices on foodgrains are raised, and raised its inflation forecast for FY13 to 7 percent from 6.5 percent.

 

"This reflects the higher-than-anticipated increase in food inflation, and the impact of the weak currency on

imported component of inflation," it said. However, not everybody is for a rate cut. Kotak Mahindra Bank chief economist Indranil Pan advised the central bank to hold the rates for now.

 

"We believe an independent central bank should not signal policy easing immediately as risks to inflation are

strong, core inflation is unlikely to come off significantly in the near-term and slower growth is essential to keep a lid on inflationary expectations given the loose fiscal stance," he said. 

 

American investment bank Citi also said inflation is likely to continue in the 7-7.5 percent range in the near-term, but could edge higher in the second half because of depreciating rupee and higher commodity prices and moderate monsoons.

 

"The momentum in core inflation suggests that manufacturers have not benefitted from lower global commodity

prices due to the rupee depreciation," Nomura said in a note. It expects the RBI to cut its overnight lending rate or the repo by 0.25 percent on Monday and said a total of 0.50 percent of cuts will be made in 2012.

 

However, unlike some calls being made to cut the cash reserve ratio or the percentage of deposits banks have to park with the central bank, Nomura said it sees no change in the CRR in Monday's policy announcement. Barclays, however, is unsure of a CRR cut saying such a possibility cannot be ruled out as the biggest priority for policymakers currently is towards a reduction in lending rates by banks.

 

A 0.50 percent reduction in CRR, as done in March, will release an additional Rs 35,000 crore into the system, it said. "The tepid pace of investment growth, intensified global uncertainties and correction in crude oil prices, provide RBI the grit to cut the repo rate by a measured 25 bps (with no CRR action) on Monday," Yes Bank chief economist Shubhada Rao said.