The Reserve Bank of India is expected to cut rates by 25 basis points in its policy review meet in April this year, a Deutsche Bank report said today.
According to the global financial services major, December CPI at 5.6 per cent was in line with expectation and would help RBI to meet its near term target comfortably.
“We expect a 25 bps rate cut in April but in case the global economy tips into a recession, thereby delaying India’s growth recovery, and if inflation remains along the glide path as projected by the central bank, then room could open up for further rate cuts in the second half of 2016,” Deutsche Bank said in a research note.
The report noted that RBI is likely to meet its near term target of achieving 5.8 per cent CPI inflation by early 2016, largely due to the ongoing correction in commodity prices.
But achieving the medium-term target of pushing inflation below 5 per cent by early 2017 is going to be an “uphill task” given the various risks from fiscal, food supply, and services sector inflation, which probably will lead RBI to maintain a cautious stance, it said.
“Consequently, we expect only one 25 bps rate cut in 2016 (early April), in our base case scenario,” the report said.
It added that “in case the global economy tips into a recession, thereby delaying India’s growth recovery, and if inflation remains along the glide path as projected by the central bank, then room could open up for further rate cuts in the second half of this year”.
The Reserve Bank may also face pressure to reduce the key lending rate further as industrial production contracted 3.2 per cent in November, its sharpest decline in four years.
Besides IIP, the central bank also looks into retail inflation data while firming up its monetary policy stance.
Retail inflation has been rising for five straight months and came in at 5.61 per cent in December.
The RBI’s next bi-monthly policy review is on February 2.