Rate cut in May likely, but not a done deal: Nomura

Attaches 80% probability that the RBI will cut repo rate by 25 bps on May 3

There is an 80% probability that the Reserve Bank will cut repo rate by 0.25% in its monetary policy review on May 3, but it is "not a done deal", leading global brokerage firm Nomura said in a research note today.

"With growth weak and WPI inflation lower, we believe that a cut is more likely than not, but it is not a done deal. We attach an 80% probability that the RBI will cut the repo rate by 25 basis points (0.25%) on May 3, followed by a long pause," Nomura said.

Declining price of vegetables pulled down inflation to over three-year low of 5.96% in March, core inflation moderated to 3.5% and food price inflation also eased to 8.2%, which is likely to prompt the RBI to consider a rate cut in its annual monetary policy next month.

In addition, the recent fall in commodity prices, including gold, is a boon for the Indian economy and would help in keeping the WPI inflation in check and also help moderate oil and gold imports in the coming months.

"However, lower commodity prices cannot replace fundamental reforms," Nomura said and noted that "India faces structural problems on food price inflation and supply constraints, which cannot be addressed by lowering interest rates".

Considering the weak growth momentum, the tax revenues of the government is likely to disappoint, in addition to this if the government continues to spend ahead of elections, then irrespective of the trend in WPI inflation, as higher spending ahead of the elections will worsen the imbalances again.

"We think monetary policy decisions based on WPI inflation (ignoring elevated core CPI inflation and supply constraints) will be erroneous. Monetary and fiscal policy should move hand in glove," it said.

Nomura further noted that there is a 20% chance that the RBI may leave rates unchanged, citing the 100 basis points (1%) of rate cuts already delivered and prodding banks to first transmit the existing cuts to consumers.

RBI, in its mid-quarter monetary policy review on March 18, reduced the repo rate by 25 basis points from 7.75 to 7.50% to help revive growth.