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A rate cut by RBI in May is likely

Last updated on: April 16, 2013 13:55 IST

RBIThere is an 80 per cent probability that the Reserve Bank will cut repo rate by 0.25 per cent in its monetary policy review on May 3, but it is ‘not a done deal’, leading global brokerage firm Nomura said in a research note on Tuesday.

"With growth weak and WPI inflation lower, we believe that a cut is more likely than not, but it is not a done deal.

"We attach an 80 per cent probability that the RBI will cut the repo rate by 25 basis points (0.25 per cent) on May 3, followed by a long pause," Nomura said.

Declining price of vegetables pulled down inflation to over three-year low of 5.96 per cent in March, core inflation moderated to 3.5 per cent and food price inflation also eased to 8.2 per cent, which is likely to prompt the RBI to consider a rate cut in its annual monetary policy next month.

In addition, the recent fall in commodity prices, including gold, is a boon for the Indian economy and would help in keeping the WPI inflation in check and also help moderate oil and gold imports in the coming months.

"However, lower commodity prices cannot replace fundamental reforms," Nomura said and noted that "India faces structural problems on food price inflation and supply constraints, which cannot be addressed by lowering interest rates".

Considering the weak growth momentum, the tax revenues of the government is likely to disappoint, in addition to this if the government continues to spend ahead of elections, then irrespective of the trend in WPI inflation, as higher spending ahead of the elections will worsen the imbalances again.

"We think monetary policy decisions based on WPI inflation (ignoring elevated core CPI inflation and supply constraints) will be erroneous. Monetary and fiscal policy should move hand in glove," it said.

Nomura further noted that there is a 20 per cent chance that the RBI may leave rates unchanged, citing the 100 basis points (1 per cent) of rate cuts already delivered and prodding banks to first transmit the existing cuts to consumers.

RBI, in its mid-quarter monetary policy review on March 18, reduced the repo rate by 25 basis points from 7.75 to 7.50 per cent to help revive growth.

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