RBI's April rate cut likely: Gunit Chadha

In our view, the most important takeaway of Thursday’s monetary policy review is the central bank’s reluctance to provide a clear monetary easing signal, given the persistence of inflation risks due to a recent surge in global crude oil prices, fiscal pressures and a weak rupee.

It seems that while the Reserve Bank of India remains ready to cut interest rates to support growth, it is not finding enough comfort on the inflation front (as yet) to signal a clear monetary easing signal. But despite this, we think that the RBI will be inclined to deliver a cut of 25 basis points rate in the April monetary policy meeting.

That could be done, citing the following reasons:

1) core inflation has shown a consistent downward trend in the last few months, indicating that the demand side pressure in the economy is weak and unlikely to spark a broad-based inflation spiral going forward;

2) growth momentum remains weak, especially related to investment activities and some support is warranted to kick start capex expansion; and 3) the inflation trajectory should ease below seven per cent through the course of the 2012-13 financial year, even with some domestic fuel price hike and therefore monetary easing should be conducted preemptively, based on this outlook.

 

Gunit Chadha 
MD & CEO (India)
Deutsche Bank