If Union Finance Minister Arun Jaitley sticks to the fiscal consolidation path while presenting the Union Budget for FY2018, there is a higher likelihood of a repo rate cut in the Monetary Policy Committee's February 2017 meeting, Aditi Nayar, a senior economist at ICRA, said in a note released on Monday (January 15).
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However, Aditi added that the room for incremental rate cuts would be limited to 25 bps over the next six months as the Reserve Bank of India (RBI) focuses more on achieving the mid-point of the inflation target range of four per cent.
"With concerns regarding the sustainability of the rebound in industrial growth in November 2016 and headline CPI inflation likely to undershoot the RBI's target for Q4 FY2017, there is a higher likelihood of a repo rate cut in February," she said.
On the inflation front, ICRA expects the CPI inflation to record one more sub-3.5 per cent figure in January 2017, before recording an uptick in February-March 2017 as the favourable base effect wanes. Overall, the rating agency continues to expect CPI inflation to undershoot the RBI's projection of five per cent for the fourth quarter of FY2017.
Going ahead, food items, particularly vegetables, may continue to display a seasonal moderation in January 2017. Moreover, a 13 per cent rise in rabi acreage for pulses has led to a decline in prices in the ongoing month. Overall, rabi sowing is seven per cent higher than year-ago levels, though on a small base. While precipitation has been low in the post-monsoon season, healthy reservoir levels on a seasonally adjusted basis would support the yields, ICRA said.
Earlier last week, government data showed that the CPI inflation eased to a 25-month low at 3.4 per cent in December 2016 from 3.6 per cent in November 2016. Food and beverages inflation declined to a 59-month low at two per cent in December 2016 from 2.6 percent in November 2016. The core-CPI inflation (excluding food and beverages and fuel and light) eased marginally to 4.9 per cent in December 2016 from five per cent in November 2016, displaying a limited reaction to changes in supply and demand after the note ban.
