In spite of the upside risk to 5 per cent inflation target by next March that the Reserve Bank sees, there is space for rate cuts with another 25 basis points cut likely this fiscal, says a report.
According to Kotak Institutional Equities, the Monetary Policy Committee (MPC) meeting minutes outlined “dovish-to- neutral” tilt of the members.
“All members cited abating of near-term inflation risks amid growth slack as the rationale for 25 bps repo rate cut,” the report said, adding that the inflation outlook was limited to 2016-17 without much focus beyond it.
All the six members of MPC voted in favour of 0.25 per cent cut in interest rate to spur economic growth as RBI Governor Urjit Patel said the 5 per cent inflation target for the fourth quarter is achievable despite upside risk.
“Overall, the minutes reinforce our belief that even as RBI still sees some upside risk to 5 per cent inflation by March 2017, the new regime’s flexible approach to inflation targeting and estimates of lower neutral rates provide space for rate cuts,” the report said adding “we pencil in another 25 bps cut in FY2017”.
MPC, which has three members nominated by the government and the rest from RBI, lowered repo rate to 6.25 per cent from 6.50 per cent at the end of 2-day deliberations on October 4.
The next meeting of the MPC is scheduled on December 6 and 7.
Retail inflation based on Consumer Price Index (CPI) in September dropped to 13-month low of 4.31 per cent, mainly on account of easing vegetables prices, creating headroom for further rate cut by Reserve Bank in coming months.