UBS sees RBI cutting rates in H2 again on falling inflation

Even as the price indices have moved up in recent months, Swiss brokerage UBS expects the same to fall during the second half and expects RBI to cut the repo rate again by 25 basis points in this fiscal and 50 basis points next year.
"We reiterate that 75 basis points more repo rate cuts are likely -- 25 basis points by end-FY16, another 50 basis points in FY17, versus no cuts expected by the street over the same period," the brokerage said in a report today.
Since January this year, the RBI has reduced repo rate by 125 basis points to 6.75 per cent.

The optimism comes even as both retail and wholesale price indices began to move up.
After inching down for many months, retail price inflation, on which the RBI basis its rate action, began to look up with the October print coming in at 5 per cent, against a consensus estimate of 4.8 per cent.
Similarly, after remaining in the negative territory for 12 full months at a stretch, WPI arrested its continued contraction in October at -3.81 per cent as prices of pulses and onion shot over the roof -4.54 per cent in September and 1.66 per cent in the year-ago month. WPI inflation has been in the negative zone since November last year.

The report said its call on lower interest rates is premised on the view of lower inflation. The second half is seasonally a period of lower inflation, even in years of double-digit inflation.

"Our analysis of seasonality and political economy implies
that there remains potential for positive surprise from lower inflation in the second half of this fiscal," it added.
The report said demand growth for food, especially shift towards proteins, is structural but not food price inflation.
"Supply has responded to demand growth. In our view, food inflation reflects more the political economy," it said.
Despite two consecutive years of deficient monsoons, government policy has ensured that food inflation remains under control, similar to earlier weak monsoons of 2002 and 2004, the report noted.

The political economy in FY 09-13 was different and manifested in policies which effectively led to cost-push driven high food inflation, it further said.
It also said that initial phase of rate cuts is not necessarily bullish for the country's equity markets as it may coincide with a slow growth reality check.