Citi sees conducive clime for easing up to 100 bps in FY16

After two years of sub-5 per cent growth and double digit inflation, the country's growth inflation dynamics have improved with easing in prices faster than expected, leading to expectations of an up to 100 bps cut in interest rates next fiscal, says a report.
"We believe conditions conducive for easing are likely in coming months as base effect wears off, government efforts on food inflation continue and the Budget reinforces fiscal discipline. Accordingly, we now expect the Reserve Bank to cut repo rate by 100 bps (one percentage point) by FY16 with 75 bps by the end of 2015," Citigroup India chief economist Rohini Malkani said in a note today.

Governor Raghuram Rajan will announce the fourth bimonthly monetary policy on December 2, amidst a rising call for rate cut.
She, however, cautioned that this position may change adversely if there is a substantial bounce-back in commodity prices, food prices spikes and if global market distorts further from what it is today. Any further expansion of quantitative easing by the Bank of Japan and possibly the ECB could also pose challenges.
Explaining the rationale for a steep cut, the report said though the global policy environment remains mixed, domestic factors are likely to be pre-dominant for policy decisions.
"Relative to growth, the normalisation in inflation has been faster than anticipated due to a sharp decline in commodity prices, continued supply-side efforts by government and RBI's anti-inflation stance," she said.

It can be noted that there was 25 per cent drop in crude, while CPI inflation has dropped to 6.47 per cent in September which is likely to fall steeply to below 5 per cent in November. However Q2 GDP growth may all come below 5 per cent against a 5.7 print in Q1, she warned.
She also commended the improvements in the macro space, with near normalisation in CAD (down from 4.7 per cent in FY13 to 1.7 per cent in FY14), and inflation down from 11.2 to 6.5 per cent.
On the impact of rate cuts on the bond yields, Malkani also said this would see bonds softening towards 7.75 per cent by end-2015 and the rupee trading at its fair value of 60-62 to the greenback.