The Reserve Bank of India (RBI) is expected to go for another 50 bps rate cut in the current financial year as there is room for further easing in monetary conditions, a Morgan Stanley report says.
According to the global financial services firm, food inflation is likely to stay benign given that the India Met Department has recently released a forecast of above normal monsoon for 2016.
“We revise lower our March 2017 inflation forecast to 4.5 per cent from 4.75 per cent earlier,” Morgan Stanley said in a research note, adding that “based on our inflation forecast and RBI’s real rate target of 1.5 per cent to 2 per cent, we expect another 50 bps of rate cuts in fiscal year 2016-17”.
Earlier this month, RBI reduced its policy rate by 0.25 per cent to 6.5 per cent — lowest level in more than 5 years. While this was the first rate cut after a gap of six months, RBI has lowered its rate by 1.5 per cent cumulatively since January 2015.
However, the industry still wants further rate cuts from RBI to boost investment.
According to the report, moderation in headline inflation was held back by poor weather in the last two years, which created episodes of food price volatility. And accordingly, the expectation of normal weather in 2016 has created a favourable environment for moderation in food prices.
In terms of pace of rate cuts, Morgan Stanley said that RBI is expected to wait for the onset of the rainfall season to see trend in actual inflation, and hence the Central Bank is likely to keep rates unchanged in the next policy meeting on June 7.
“We a higher chance of RBI reducing rates in the Oct meeting,” it said, adding however that there is a possibility of RBI cutting rates in the August meeting if the rain fall arrives in time and is significantly above normal by end of July.
“Post that we expect RBI to move in December or February meeting, with the key event to watch being Fed monetary policy action,” Morgan Stanley said.