RBI may cut repo rate by 25 basis points in Feb: HSBC report

RBI has set an objective of achieving CPI inflation of 5% by Q3 of the FY 2016-17

With uncertainty over implementation of GST, rising crude oil prices and the challenging 4% CPI target in medium term, Reserve Bank may cut repo rate for the final time by 25 basis points in the February policy, says a report.

"We hold on to our expectation of a 25 basis points rate cut in February, but caution that this would likely bring the easing cycle to an end, given the pressures in the horizon - implementation of the GST bill, rising oil prices, implementation of government employees housing allowance, and the challenging 4% CPI target for the medium term," HSBC said in a report on Friday.

RBI has set an objective for achieving consumer price index (CPI) inflation at 5% by the third quarter of the financial year 2016-17 and the medium-term target of 4% within a band of +/- 2%.

Retail inflation eased to 3.41% in December, which is a 25-month low as against 3.63% in November.

The report said the RBI will meet its 5% CPI target for March comfortably.

HSBC said since demonetisation, high frequency food data prices have been moderating.

"As such, we are not surprised to see both y-o-y and m-o-m non-seasonally adjusted fall in December prices. Vegetables, pulses and fruits led the charge," it said.

The November Index of Industrial Production (IIP) rose to 13-month high of 5.7% compared to the contraction of 1.9% in October.

The report said the numbers need to be interpreted with care as the IIP series tend to undergo sharp revisions as more companies report production activity and subsequent revisions could well be downward.

"Also, much of the pain following demonetisation is likely to show up in upcoming months," it said.

The HSBC report said on the back of the ongoing cash crunch (still a 40% contraction in effective currency in circulation), it expects GDP to grow 5% y-o-y in the October-December quarter and 6% y-o-y in the January-March quarter.

"We expect growth to normalise gradually towards the 7% ballpark, but remain shy of the 7.5-8% range in the financial year 2017-18, due to adjustment costs that businesses and consumers face, in the process of formalisation and digitisation," the report says.