RBI may cut rate even before June 2: SBI Research

Bank expects 25 bps rate cut due to easing inflation and likely Fed tightening by the year end

 

The Reserve Bank may cut rate by 25 basis point even before its monetary policy review on June 2 as inflation is easing and the US Fed tightening is expected by year end, SBI said in a research note today.

The rate cut is most likely to take place after May 12, when release of CPI data is scheduled, it said.

"RBI may go for a 25 bps rate cut on or even before June 2 (after May 12, with the release of CPI data) with easing inflation and likely Fed tightening by the year end," said the research note by State Bank of India.

It said retail inflation for April is likely to be at sub 5 per cent level, with a significant possibility of being close to 4.75 per cent. Wholesale Price Index-based inflation would possibly slide to a negative 2.7 per cent or even lower.

Before keeping the key policy rates constant in its last bi-monthly monetary policy in April, RBI in a surprise move had slashed the key repo rate twice by 25 bps each, to 7.50 per cent.

The easing of repo rate was mainly driven by decline in prices of vegetables and fruits, ebbing price pressures in respect of cereals and large fall in international commodity and crude prices.

RBI will hold its next monetary policy review on June 2.

On Fed rate hike, the report said it is likely to go for a rate hike possibly in 2015 for "Non-Macro Reasons".

US Fed rate hike is closely linked to the US Presidential elections, SBI Research said, adding that there is a great chance that the US may "front-load" its rate hike in September/December this year.

"An analysis of past years' trend suggests that there is at least a 37 per cent probability that a rate hike in an election year leads to a change in the ruling party's position," the report said.