RBI likely to cut policy rates at its June 17 meeting

Taking a cue from the continued downward surprises in inflation and sluggish growth indicators, the Reserve Bank of India is likely to go for further monetary easing in its June 17 policy meet, global investment banking majors have said.

The headline wholesale inflation fell to 41-month low in April (4.89 %), dropping within the central bank's comfort zone of less than 5% and fuelling market hopes of more monetary easing to revive sagging economic growth.

     
"We believe the WPI inflation report provides ample room for the RBI to cut policy rates at its June 17 policy meeting," Barclays said in a research note.

     
Barclays further added that "we expect the repo rate to be cut to 7 % (another 25 bp cut) by mid-2013. Moreover, we think the likelihood of further rate cuts (another 50bp to 6.50 %) in the second half of 2013 has risen significantly".

RBI is scheduled to announce mid-quarter review of monetary policy for 2013-14 on June 17.

   
According to HSBC Chief Economist for India & ASEAN, Leif Lybecker Eskesen, "the inflation picture is clearly improving, which has increased the chance that the RBI will ease again".

However, Eskesen further noted that "the room for rate cuts is limited due to elevated inflation expectations and the wide current account deficit. The growth ails instead primarily have to be cured through a heavy dose of reforms, which can lift the structural constraints on growth."

Echoing similar sentiments, Morgan Stanley in a research note said "we expect RBI to cut policy rates by a further 25-50 bps (0.25-0.50 %) by end FY2014 and market oriented interest rates to decline by 100bps (1 %)".

Bank of America Merrill Lynch said: "We have added a second 25bps (0.25 %) RBI rate cut on July 30 after the one on June 17 to revive growth after April WPI inflation dropped to 4.9%."

Meanwhile, the Reserve Bank of India has also said it would take into account falling inflation while deciding on policy initiative in its review next month.

   
 "We certainly will take note of the softening of inflation and the external payments situation in the next mid-quarter policy statement on June 17," RBI governor D Subbarao said last week.