Brokerages see scope for 25 bps repo rate cut in June 2 RBI policy meet

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Mumbai | Published: May 5, 2015 6:52:53 PM

BofA-ML said RBI Governor Raghuram Rajan will go in for a 0.25 per cent rate cut at the June 2 policy review, but may pause thereafter.

RBI monetary policyBofA-ML said RBI’s pre-conditions for a rate cut are “largely met”, with banks cutting their base rates after some straight talk from the Governor Raghuram Rajan. (Express Photo by Ganesh Shirsekar)

The Reserve Bank of India (RBI) is expected to cut rates in its June policy review meeting on softening food prices, analysts have said.

“The recent softening in food prices could continue into 2015 and forms the basis for our June rate cut call,” HSBC said in a note, but cautioned that we should not be “fooled” as the food price disinflation is not yet entrenched.

BofA-ML, on its part, said Governor Raghuram Rajan will go in for a 0.25 per cent rate cut at the June 2 policy review, but may pause thereafter.

“RBI will likely pause thereafter to see our expected September Fed rate hike through and cut 50 bps in early 2016 after markets price in the Fed tightening,” the American brokerage said.

The retail inflation eased to a 3-month low at 5.17 per cent for March, down from 5.37 per cent acceleration in February, setting off expectations of a rate cut.

BofA-ML said RBI’s pre-conditions for a rate cut are “largely met”, with banks cutting their base rates after some straight talk from the Governor and some resilience in food prices even after the unseasonal rains.

It also pointed to the recently released minutes of the Technical Advisory Committee (TAC), which showed a divided house where Rajan vetoed the majority view for a rate reduction and chose the status quo.

Rajan has surprised the markets with two inter-meeting cuts of 0.25 per cent each in January and March. The adoption of inflation targeting framework with an explicit target in the range of 4-6 per cent in the medium-term only makes the job of policy-making a bit easier, according to experts.

Even though inflation remains within RBI’s comfort level, HSBC warned of potential threats to a price rise.

“When domestic demand recovers or global commodity prices rise, the cost of food could quickly rebound. Ultimately, sustained disinflation hinges upon food reforms in production and distribution, and a much improved investment climate,” it said.

After 2015, the quantum of cuts depends on structural reforms, it said, reminding that the medium target of RBI is to arrest the price rise at 4 per cent by 2018.

“If they (structural reforms) are coming, there could be space to cut. But if not, RBI may just have to sit tight,” it said.

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