The Reserve Bank is likely to cut the key interest rate by another 25 bps this fiscal as retail inflation is likely to be around 5 per cent, says a Citigroup report.
According to the global financial services major, there is a possibility of 25 basis points cut in 2015-16, while further easing would depend on “real rate dynamics”.
“Going forward we see a room of further 25 bps cut based on our estimate of average CPI inflation at 5 per cent in FY16 and RBI’s comfort range on real rates at 150-200 bps,” Citigroup India Economist Anurag Jha said in a research note.
The report noted that further easing space could open up if Consumer Price Index based inflation continues to undershoot RBI’s projection and is on course to sustainably meet its 4 per cent target on or before January 2018.
“Given RBI’s mandate to contain CPI inflation within 4 per cent 2 per cent band, it is natural that the CPI inflation will continue to dominate policy narrative,” it said.
India’s CPI inflation hovered at double digits for over 5 years before easing to an average 5.1 per cent in 2015. In response to slowing inflation and still sub-par growth, RBI eased key rates by 75 bps taking repo rate to 7.25 per cent.
In the June 2 policy review meet, RBI had cut repo rate by 0.25 per cent for the third time this year to spur investment and growth, but hinted that there may not be any more cuts in the near term.
RBI cut the repo rate (short-term lending rate) from 7.5 per cent to 7.25 in June, but left all other policy tools such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged at 4 per cent and 21.5 per cent, respectively.