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Why RBI is unlikely to cut rates despite fall in inflation

Even though the headline retail inflation has eased to a five-year low of 6.5 percent in September, analysts today said the Reserve Bank is unlikely to cut its key rates in the remaining period this fiscal.

Even though the headline retail inflation has eased to a five-year low of 6.5 percent in September, analysts today said the Reserve Bank is unlikely to cut its key rates in the remaining period this fiscal. “We believe that the RBI will remain on hold for the rest of this fiscal,” ratings agency Crisil said in a note, citing factors like the continuing upward risks to the 6 percent target for January 2016 that will make a rate reduction difficult.

Additionally, another restricting factor will be the implementation of a new monetary policy framework as suggested by the Urijit Patel committee, it added. Singaporean brokerage DBS said the pressure is likely to build on the RBI for a cut, “but the central bank is unlikelyto shed its cautious stance as yet” and Rajan will “look through these swings” in the inflation numbers.

Also read: Is the data enough now for RBI to act?

Analysts attributed the lower September print at a low of 6.5 percent to the base effect, something which RBI Governor Raghuram Rajan had alluded to in the last monetary policy tatement. As for the trajectory in the future, they said apart from the high base, the ongoing correction in the global crude prices will also help ease inflation. However, Japanese brokerage Nomura said there are “downside risks” to the RBI’s January 2016 forecast on CPI, and added the number shall touch 6 per cent by mid-2015, much ahead of the targeted January 2016.

Similarly analysts at Bank of America Merill Lynch also said that it expects Rajan to hold rates at the December 2 policy announcement and cut them in February. “We grow more confident that Governor Rajan will cut policy rates from February after CPI eased in September,” they said in a note.

With official data released today saying that inflation measured by wholesale prices dropping to a five-year low of 2.7 percent in September, analysts at Citi said the upside risks to the 6 percent CPI target have “subsided materially”. It said the benign outlook on global commodities, stability in the rupee, drop in core CPI and supply side efforts to contain food inflation make it confident on the inflation outlook.

In the past, Rajan, who has hiked rates thrice since September last year and continues to hold it at an elevated 8 percent levels despite pressure from the pro-growth lobby, has said he prefers not to wage repeated battles on inflation and wants to fight it once for all.

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