RBI may cut rates despite inflation risks: Citi

MUMBAI: Despite inflation likely to remain well above the Reserve Bank’s medium-term target of 4%-5%,Citi expects the central bank to cut the key policy rates by 50 basis points or bps ( pne bps is 0.01%) in FY13 due to the deceleration in growth. As for the inflation outlook, the interplay between commodity prices and currencies will hold the key in detrmining the future course in food prices, it siad.

“While the base effect will likely result in inflation trends remaining benign in the coming months, we maintain our view of inflation averaging 8% in FY13” said Rohini Malkani, Citi’s India economist. This is because food prices could come under pressure due to weak trends in crop sowing (down 10%). Moreiver moves to lower 'suppressed inflation' – a partial fuel hike would increase the WPI by 60 bps.

“Nonetheless, despite inflation likely to remain well above the RBI's medium-term target of 4%-5%, we are holding on to our 50bps rate cut call in FY13 due to the deceleration in growth (as seen in factory output, auto sales, exports).” she added.

The headline WPI numbers have surprised for the second consecutive month. While adverse monsoons and global weather conditions are likely to keep the pressure on trends in food price inflation, the key to watch in the coming months is the interplay between currencies and commodity prices. During 2008-2009 the fall in commodity prices more than offset the 20% fall in the currency. This resulted in headline inflation coming off sharply from double-digit levels in 2008 to low single digits in 2009. “While geo-political tensions and supply-side issues have resulted in crude moving up last month, many of the China-linked commodity prices have come off, despite chatter on global monetary easing. Given that 50% of India's WPI is commodity-linked, if trends continue, this could potentially offset higher primary articles inflation.” said the report.