New Delhi:The Reserve Bank is likely to go for a rate cut on or before the June 2 policy review as the CPI inflation fell to a 4-month low of 4.87 per cent in April and industrial output declined in March, say experts.
According to analysts, the mix of slowing inflation and weaker-than-expected growth are indicating that a policy rate cut is on the anvil. While a rate cut on or before June 2 is most likely, beyond that, room for additional rate cuts depend on structural reforms that the government undertakes.
Retail inflation eased to a four-month low of 4.87 per cent in April while industrial output slowed to a five-month low of 2.1 per cent in March. The twin macro-economic indicators strengthen government and industry's call to RBI Governor Raghuram Rajan to cut interest rates.
"We are penciling in a 25 bps repo rate cut by RBI on June 2 or even before that," SBI said in a research note.
According to experts, the next round of rate cut may now be driven more by growth considerations, as inflationary momentum is likely to remain subdued.
"We are convinced that retail inflation trajectory will be significantly benign on the back of a loss of purchasing power in rural economy," SBI said adding that "if inflation numbers stay below 5 per cent, there is an outside chance of an additional 25 bps cut".
Similarly, Citigroup in a research report said "given our outlook on CPI averaging at 5 per cent and RBI's comfort range on real rates at 150-200 bps, we expect the RBI to normalise policy rates by reducing the repo rate by further 50 bps in the current financial year.
In terms of timing, Citigroup said that the next cut of 25 bps is likely to come as early as in June policy. "Also, we believe domestic factors will continue to dominate monetary policy discourse," it added.
Japanese brokerage firm Nomura also said that the RBI is likely to deliver a final 25 bps rate cut in June.
"Beyond that, with medium-term CPI inflation likely to stabilise at around 5-5.5 per cent, higher than the RBI's medium term target of 4 per cent, we see no space for further easing and expect the RBI to remain on hold at 7.25 per cent until end-2016, as the growth cycle gains further traction," Nomura added.
The central bank has lowered its policy rate twice so far in 2015, but maintained a status quo in its last monetary policy review on April 7 on fears of unseasonal rains impacting food prices.
The next review meeting is scheduled on June 2, although the previous two cuts have taken place outside the scheduled policy reviews.
