The Reserve Bank is likely to cut interest rates in its upcoming monetary policy review next month despite retail inflation surging to an eight-month high in June, rating agency Moody’s said on Tuesday.
According to Moody’s Analytics, the rise in CPI inflation was largely due to base effect.
“We still think the Reserve Bank of India will deliver another interest rate cut in 2015,” Moody’s Analytics Associate Economist Faraz Syed said in a research note.
As per official data, retail inflation surged to an eight month high of 5.4 per cent in June, from 5.01 per cent in May. It was 6.77 per cent in June last year.
“Despite higher CPI inflation, the RBI will deliver another rate cut at its upcoming monetary policy review scheduled for August 4,” it said.
The rise in inflation, a key factor considered by the RBI in deciding the monetary policy, comes in the backdrop of slowdown in factory output.
The Index of Industrial Production (IIP) in May slowed to 2.7 per cent from 5.6 per cent a year ago, leading to demands of rate cut from the RBI in its next policy review on August 4.
Syed further said that though food prices are rising, rainfalls have been “near average” levels in recent weeks which was one of the pre-condition, for the RBI to maintain an easing bias.
Moreover, the small rise in minimum support prices for maize and rice has been well below the average increases in previous years and should limit food inflation in the coming months, the report added.
RBI, in its last policy review on June 2, had cut the 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.
Moody’s Analytics expects the wholesale prices to fall further. The June wholesale price-inflation slipped to (-)2.4 per cent, from (-)2.36 per cent in May.
According to Moody’s Analytics, the WPI offers a better gauge of core inflation than the CPI and core inflation, in the WPI measure, has been falling in the past few months.
WPI inflation has been in the negative zone since November, 2014.
“Overall weak core inflation suggests GDP growth remains below potential. We think the RBI will cut the repo rate to 7 per cent in 2015,” the report noted.