InvestorQ : Do you see any rate cuts by the RBI in 2020 or will it be put off after the CPI inflation?
Rashi Mehra made post

Do you see any rate cuts by the RBI in 2020 or will it be put off after the CPI inflation?

Archita Jajjoo answered.
2 years ago

CPI inflation coming in at 6.93% has surely dented India’s chances of a rate cut in this year. While October is more or less ruled, even December looks doubtful. Here is why.

· CPI inflation for June, was revised upwards to 6.23% from 6.09% hinting that even the July number of 6.93% could be susceptible to upward revision

· In seven out of the last eight months, the CPI inflation has breached the 6% mark, which is the outer tolerance limit for RBI on the inflation front

· This compares very unfavourably with the RBI target to keep inflation at 4% with a leeway of 2% on the downside and 2% on the upside

· Barclays has expressed the view that due to inflation trajectory, room for further rate cuts was unlikely to emerge until till the first quarter of calendar 2021

· If you look back at the monetary policy, the committee voted unanimously to hold interest rates citing rising concerns over inflation. That looks real now.

· With better monsoon and progressive easing of lockdown, RBI will wait for inflation to come down to RBI's comfort levels before taking a call on rate cuts

· Notably, RBI has cut repo rate by 115 bps since the lockdown began, but there is little to show by way of credit uptick, despite transmission of over 75%

· Food inflation at 9.62% remains the bugbear as it accounts for more than 50% of the CPI basket and that is perched at a 4-month high

· Core inflation touched a 21-month high of 5.9% in July and that is the stickiest aspect of inflation which has been unrelenting

Finally, the supply disruptions in food could keep farm prices at elevated levels. Kharif data could be the key input from here on.