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RBI may cut repo rate by 25 basis points in Feb: HSBC report

RBI has set an objective of achieving CPI inflation of 5% by Q3 of the FY 2016-17

Press Trust of India  |  Mumbai 


With uncertainty over implementation of GST, rising prices and the challenging 4% target in medium term, Reserve may cut for the final time by 25 basis points in the February policy, says a report.

"We hold on to our expectation of a 25 basis points rate cut in February, but caution that this would likely bring the easing cycle to an end, given the pressures in the horizon - implementation of the bill, rising prices, implementation of employees housing allowance, and the challenging 4% target for the medium term," said in a report on Friday.

has set an objective for achieving consumer price index (CPI) at 5% by the third quarter of the financial year 2016-17 and the medium-term target of 4% within a band of +/- 2%.

Retail eased to 3.41% in December, which is a 25-month low as against 3.63% in November.

The report said the will meet its 5% target for March comfortably.

said since demonetisation, high frequency food data prices have been moderating.

"As such, we are not surprised to see both y-o-y and m-o-m non-seasonally adjusted fall in December prices. Vegetables, pulses and fruits led the charge," it said.

The November Index of Industrial Production (IIP) rose to 13-month high of 5.7% compared to the contraction of 1.9% in October.

The report said the numbers need to be interpreted with care as the IIP series tend to undergo sharp revisions as more companies report production activity and subsequent revisions could well be downward.

"Also, much of the pain following demonetisation is likely to show up in upcoming months," it said.

The report said on the back of the ongoing cash crunch (still a 40% contraction in effective currency in circulation), it expects GDP to grow 5% y-o-y in the October-December quarter and 6% y-o-y in the January-March quarter.

"We expect growth to normalise gradually towards the 7% ballpark, but remain shy of the 7.5-8% range in the financial year 2017-18, due to adjustment costs that businesses and consumers face, in the process of formalisation and digitisation," the report says.

First Published: Fri, January 13 2017. 16:02 IST