Inflation Data Paves Way for Another Rate Cut, Say Nomura, Barclays, Deutsche Bank

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Global investment banks such as Nomura, Barclays and Deutsche Bank say that markets can expect another rate cut by the Reserve Bank of India (RBI), possibly in the August meeting, as inflation data for May remained comfortably within the central bank’s target level of 4%.

Retail inflation rose to a seven-month high of 3.05% in May from 2.99% in April, mainly driven by an increase in vegetable prices. Meanwhile, the index of industrial production (IIP) expanded surprisingly at 3.4% in April from 0.3% a month ago. Nomura expects headline inflation to average 3.5% in the second half of the year, and sees up to 25 basis points rate cut in August on below-target inflation and likely growth disappointment.

“CPI (consumer price index) inflation of 3.05% was broadly in line with expectations. But, food inflation unsurprisingly picked up. On the other hand, core inflation eased as expected to 4.1% from an upwardly revised 4.7% in April,” Nomura said in a report.

Another global investment bank Barclays said the uptick in May CPI inflation was driven by a rise in food prices and adverse base effects. “Inflation appears to be broadly tracking what RBI anticipates in its projections. We lower FY20 CPI forecast to 3.7% from 4.1% previously. Another 25 bps repo rate cut in August is our baseline forecast,” said the note.

Meanwhile, Deutsche Bank said that even though the April IIP data was encouraging, the overall growth momentum remained weak. The global bank, too, expects one more 25 bps rate cut in the August or October policy meeting.

Last week, the Reserve Bank of India (RBI) cut policy rates for the third consecutive time by 25 basis points and changed its stance to accommodative from neutral, signalling more rate cuts were in store to revive growth momentum.

“Growth impulses have weakened significantly as reflected in a further widening of the output gap compared to the April 2019 policy. A sharp slowdown in investment activity along with a continuing moderation in private consumption growth is a matter of concern,” the monetary policy committee of RBI said in its statement.