StanChart lowers FY16 inflation target; expects 75 bps rate cut

The report further said domestic inflation trajectory is expected to be 'benign' in the first half of FY16

The Reserve Bank will be able to go in for 75 basis points rate cut in the coming months as it is expected to comfortably meet its 6 per cent inflation target for January 2016, says a report.

Of the total, 50 basis points cut is expected within a couple of months, said the Standard Chartered report.

According to the global financial services major, the revised inflation readings released on February 12, with 2012 as base year, shows that inflationary pressure was "lower than initially suggested".

"Considering the positive surprise in the inflation print under the new series, we revise our average inflation forecasts lower to 5.4 per cent in financial year 2015-2016 (from 5.8 per cent under the old series)," Standard Chartered said in a research note.

"We believe the low inflation readings released on February 12 indicate that the RBI will be able to comfortably meet its 6 per cent CPI inflation target for January 2016," the report said, adding that "the revamped CPI series shows that inflationary pressure was far lower than initially suggested".

The global brokerage firm said the recent readings would pave the way for a total repo rate cut of 75 basis points in the coming months. The repo rate at present is 7.75 per cent.

"We think a 50 basis points cut to 7.25 per cent by April is highly likely, but that the timing of the next 25 basis points cut (to 7.0 per cent) will be affected by when the first Fed rate hike materialises and its impact on the external sector," the Standard Chartered report said.

The report further said the domestic inflation trajectory is expected to be "benign" in the first half of financial year 2015-2016.

It suggested that RBI should lower the interest rate as it is needed to boost consumer and investment sentiments.

The Reserve Bank in its February 3 Monetary policy review had left interest rates unchanged, saying that there was no substantial development on inflation or fiscal fronts to warrant a fresh reduction.

This stance had followed a surprise rate cut by RBI on January 15 to tackle dis-inflationary pressure.