Inflation, IIP data bring cheer; will RBI cut rates in coming months? Analysts divided

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New Delhi | Updated: April 12, 2016 6:38 PM

Adding to a slew of positive economic news, CPI inflation and IIP data came in better than expected at 4.83% for March and 2% for February, respectively.

rbiAnalysts are divided on the scope that RBI will have to lower key rates substantially in the coming months (Reuters)

Adding to a slew of positive economic news, CPI inflation and IIP data came in better than expected at 4.83% for March and 2% for February, respectively.

The decline of consumer price inflation to below 5% levels, specially brought cheer among economists and analysts who believe that RBI’s biggest worry is now under control. However, analysts are divided on the scope that RBI will have to lower key rates substantially in the coming months.

Both rural and urban inflation declined, with the former declining to 5.70% versus 6.05% in February, and latter coming at 3.95% versus 4.30% in February.

Sidhartha Sanyal of Barclays, expects inflation for the entire year to be around 4.8% levels. “We were expecting inflation to be around 5%, this is a great number,” Sanyal told a television channel.

A Prasanna, Economist at ICICI Securities does not expect any action from the RBI on the rate cut front. “In terms of monetary policy we do not expect any action from the RBI as inflation has to consistently print below 5% for the central bank to be convinced that its inflation target will be achieved. Inflation excluding petrol still remains sticky at 5.1%,” Prasanna said.

“The downside surprise from food inflation has sustained. If monsoon turns out good, then some disinflation in pulses will continue. However, services inflation remains sticky, which will prevent inflation from sustaining below 5%,” Prasanna adds.

Echoing the same sentiment, Shilan Shah, India Economist at Capital Economics Singapore said, “Ee still think that the RBI has a tough task in meeting its inflation targets. One factor that is likely to add to inflation over the coming months is that fuel inflation is set to rise as the deflationary impact of lower global oil prices continues to reverse.”

“There are reasons to think that the finance ministry will be forced to relax its budget deficit targets over the coming months. A looser fiscal stance could  boost inflation expectations, which have already been rising of late,” Shah added.

However, Shubhada Rao, Chief Economist at Yes Bank differs. “Although we expect some of the food price momentum to pick up in coming 2-3 months, outlook for monsoon being favourable should be adequate to offset interim price pressure on food. The overall inflation trajectory appears to be well within RBI’s indicative target for March, and as such, we expect a 25 bps rate cut as early as June,” said Rao.

“If food inflation surprises on a significant downside on RBI’s target by 50 bps by March, further rate cuts cannot be ruled out,” added Rao.

IIP for the month of February was recorded in the positive territory after a gap of three months. Most analysts are happy with the data, but expected the number to be higher.

Sanyal of Barclays said, “We were expecting IIP to be in the mid-single digits. It is less than expected, but still in the positive territory.”

Prasanna of ICICI Securities questioned the sustainability of the recovery. “IIP (industrial output) number is definitely positive but capital goods output continues to be disappointing which raises a question mark on the sustainability of the recovery unless investment demand picks up,” Prasanna said.

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