RBI May Cut Interest Rate by 25 Bps in June; 50 Bps in Next 2 Quarters: ASSOCHAM

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Apex Industry body ASSOCHAM today said it expects the RBI to cut policy interest rates by 25 basis points in its June 2 policy and another 50 bps in the subsequent two quarters.

As the retail inflation is hovering at levels, much below foreseen by the central bank itself and the industry needs a demand trigger for a revival.

RBI Likely to Cut Interest Rate by 25 Bps in June: ASSOCHAM

In a note submitted to the Governor of Reserve Bank of India (RBI) Dr Raghuram Rajan, ASSOCHAM Secretary General Mr. D S Rawat said, the Consumer Price Index (CPI) is expected to be in a range of 4.5-6.0% over the remainder of 2015.

Based on the RBI's view, the real interest rate should be around 150-200 bps. "Thus, we anticipate a 50 bps reduction in the repo rate over the remainder of this calendar year, while 25 bps should be announced right away".

The ASSOCHAM also highlighted its concern over non-transmission of lower policy interest rates by banks to the borrowers.

It said the RBI had, in the last review, left the rates unchanged, since it was waiting for transmission of earlier 50 bps Repo cuts to the borrowers.

In its April 2015 review, the central bank had indicated its forecast that CPI inflation would be at 5.8% in March 2016, lower than its target of 6.0% for January 2016.

It also indicated that it would look through seasonal as well as base effects with reference to the inflation trajectory.

The two CPI prints released post April 2015 review have pointed towards easing of inflationary pressures, with a decline in retail inflation from 5.4% in February 2015 to 5.3% in March 2015 and further to 4.9% in April 2015.

While caution is warranted on account of reports of an evolving El-Nino and the Indian Metrological Department's (IMD's) forecast of a 7% deficit (~62 mm) in monsoon rainfall during 2015, this is milder than the shortfall of 12% (~109 mm) recorded in 2014.

Moreover, the impact of a weak monsoon may be reduced by the moisture in the sub-soil as a result of excess rainfall of ~53 mm during Jan 1-May 20, 2015, as well as higher reservoir storage levels in north and south India relative to the year-ago period.

Nevertheless, the spatial and temporal dynamics of rainfall in 2015 would be critical.

While it is possible that MSP growth going forward will exceed the modest levels seen in the last year, adequate buffer stocks of wheat and rice as well as a global downtrend in prices of sugar and edible oils would dampen inflationary pressures.

Persisting high inflation related to pulses (12.5% in the CPI, 15.4% in the WPI in April 2015) remains a dominant concern, particularly given that a substantial portion of production is concentrated in states with relatively limited irrigation coverage and that demand exceeds domestic supply

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