Low retail inflation increases hopes for rate cut by RBI:Ind-Ra

The retail inflation eased to a five-month low of 5.05% in August, raising the expectations of a cut in interest rates. The India Ratings and Research (Ind-Ra) echoing the view has said that sharp fall in retail inflation in August has revived hopes for a rate cut when the Reserve Bank of India (RBI) meets early next month to review monetary policy.

Rating agency has said that the sharp fall in retail inflation in August 2016 has increased the rate cut proposition in the next quarter itself, making the central bank’s target of bringing retail price inflation down to 5 per cent by March 2017 achievable. Though it believes scope for RBI action on rate front appears skewed towards December policy review than October 2016

Pointing to the contraction of 2.4 per cent in July 2016 as against a growth of 2.0 per cent in June Index of Industrial Production (IIP), Ind-Ra has said that that industrial growth will not return to a sustained and high growth path as long as excess capacity in the manufacturing sector remains and private sector investment cycle does not revive.

It further stated that the RBI would have better clarity on the retail inflation trajectory for the last quarter of the fiscal, US electoral outcomes and Federal Reserve rate trajectory by December 2016. It also noted that the maturity of large FCNR-B (foreign currency non-resident) deposits worth $26 billion, which are coming due in the next two months, is likely to be the litmus test for the rupee as well as the RBI.