Economy
A rate cut in May is likely, but not a done deal says Nomura

With weak growth and lower WPI inflation, Nomura believes that a cut is more likely than not, but it is not a done deal. Nomura expects the RBI to cut the repo rate by 25 bps on 3rd May followed by a long pause

The recent fall in commodity prices, including gold, has come as manna from heaven for the Indian economy. It should keep wholesale price index (WPI) inflation in check and help moderate oil and gold imports in the coming months. According to Nomura Financial Advisory and Securities (India) Pvt Ltd, a rate cut in May by the Reserve Bank of India (RBI) is more likely, but it may not be a done deal.
 

“We attach an 80% probability that the RBI will cut the repo rate by 25 basis points (bps) on 3rd May and a 20% chance that the RBI may leave rates unchanged, citing the 100 bps of rate cuts already delivered and prodding banks to first transmit the existing cuts to consumers,” Nomura said in a research note.

 

According to Nomura, India faces structural problems on food price inflation and supply constraints, which cannot be addressed by lowering interest rates. If commodity prices sustain their recent fall, then the trend in both headline and core WPI inflation should be lower, it says.

 

During March, India’s WPI inflation fell to 5.96% y-o-y from 6.84% in February, led by an across-the-board fall in inflation. Core inflation (WPI Mfg ex-food) moderated to 3.5% y-o-y from 3.8% in February and food (primary and manufactured) price inflation also eased to 8.2% from 10.2%.

 

“However, unless the vicious circle between rising minimum support prices, food prices and rural wages is corrected, we think CPI inflation will remain in the 9-10% range. Hence, in the current environment of high food prices and low commodity prices, the gap between WPI and CPI inflation will likely remain wide,” Nomura warned.

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