RBI to cut interest rate by 0-25 bps in FY17: Ambit

The Reserve Bank is expected to go for limited rate cuts to the tune of 0-25 bps this financial year and going forward inflation is unlikely to be "benign", says a report.
According to the report by financial services and investment research firm Ambit, there are political underpinnings of inflation in India, whereby a systematic step-up in inflation materialises in the run-up to general elections.
"Besides the political economy dynamics that are likely to drive inflation higher in the run-up to the CY19 General Election, GST implementation will add to inflation as well (according to the current Chief Economic Advisor, a GST rate of 15.5 per cent could add to inflation by 30-70 bps)," Ambit said in a research note.

"We hence retain our view that rate cuts to the tune of only 0-25 bps are likely to be administered in FY17," it added.
With a new RBI Governor about to take charge in September, more rate cuts are being widely expected.
However, the report said the consensus view that inflation is under control and more rate cuts are on the anvil ignores the political underpinning of inflation in India, whereby a step-up in inflation typically materialises in the run-up to general elections.

"Our discussions with our sources in Delhi and in state capitals suggest that the historical pattern is likely to be repeated again," it said.

A historical analysis of inflation cycles in India suggests that average inflation tends to be higher in the last two years leading up to a general election.
There appear to be two key drivers which propel inflation upwards -- higher subsidy spends being undertaken in the last two years of a five-year cycle; and the need for election funding, leading politicians to collude with promoters who suppress competition, and then push through price hikes.
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.