50 bps cut in policy rate by March quarter: Morgan Stanley

Inflation in India is expected to fall to 4.5 per cent by the quarter ended March 31, and this in turn would give Reserve Bank space to cut key policy rates by 50 basis points this fiscal, says a Morgan Stanley report.

According to the global financial services major, disinflationary pressures would keep RBI on an easing path.

"We expect a 50 bps cut in the policy rate by quarter ended March 2017," Morgan Stanley said in a research note.

In the June policy review meet, RBI Governor Raghuram Rajan kept interest rates intact, citing rising inflationary pressure, but hinted at a reduction later this year if good monsoon helps ease inflation.

The report further noted that inflation is expected to fall to 4.5 per cent by quarter ended March 2017.

Fall in inflation would be largely because key drivers like commodity prices, wage costs, fiscal consolidation, property prices remain at benign levels and this in turn would give "the RBI space to cut policy rates by another 50 bps by quarter ended March 2017 and taking cumulative rate cuts since January 2015 to 200 bps," Morgan Stanley added. (Earlier this quote was wrongly attributed to Nomura).

The industry is still hopeful of further rate reduction from the central bank to boost investment.

According to Morgan Stanley, "we expect macro-stability conditions to be maintained as the recovery is expected to be driven by rise in productivity, with a low risk of the economy overheating."

Meanwhile, the wholesale inflation accelerated for the third straight month in June hitting 1.62 per cent on costlier food and manufactured items.

The hardening of the WPI index follows an uptick in retail inflation, which hit a 22-month high of 5.77 per cent in June, dampening chances of a rate cut by RBI at its next policy meet scheduled for August 9.