Nomura sees 0.25% rate cut in April

With inflation remaining under its six per cent target and oil prices falling, the Reserve Bank of India (RBI) is likely to go for a final interest rate cut of 25 basis points in April, financial services major Nomura said.

"Despite the uptick in the latest CPI print, inflation is well below the RBI's six per cent target (January 2016), core CPI inflation is steady around 5 per cent, oil prices have fallen sharply (-35 per cent y-o-y) and exports are contracting in double digits.

"Therefore, in our base case, we expect the RBI to deliver a final 25 basis points rate cut in its post-budget policy meeting in April 2016," according to the latest Nomura RBI Policy Signal Index (NRPSI).

The next RBI policy will be announced on February 2. The January 2016 reading for NRPSI is -0.24, which implies that the probability of a rate cut is 24 per cent higher than the probability of a rate hike.

"This signals a reasonably high likelihood of further easing and is consistent with the RBI's current accommodative monetary policy stance," it said.

Retail inflation measured by the Consumer Price Index (CPI) quickened to 5.61 per cent in December from 5.41 per cent in November 2015 and 4.28 per cent in December 2014.

Nomura said beyond the 25-basis point rate cut in April, RBI would remain on hold until the end of 2016.

"Given inflation expectations have yet to fall materially, a gradual narrowing of the output gap and the upside risks to the RBI's medium-term inflation target of four per cent (March 2018), we see the terminal repo rate at 6.5 per cent, it added.