The Reserve Bank of India is likely to further cut the key lending rate by 75 basis points this financial year despite its hawkish stance, although it may hold the pause button in the next monetary policy review, a UBS report said.
The global financial services major said RBI has to bring down inflation expectations and it is still too early in the rate easing cycle for it to turn dovish.
In the policy review meet on June 2, RBI cut interest rate by 0.25 per cent for the third time this year (first in the financial to spur investment and growth but hinted there may not be any more cuts in the near term.
It cut the repo rate (short-term lending rate) from 7.5 per
cent to 7.25, but left all other policy tools like cash reserve requirement unchanged at 4 per cent and statutory liquidity ratio (SLR) at 21.5 per cent.
“This commentary tone suggests a potential pause in policy rate cut cycle at the next policy meeting, but that would still be consistent with our projection of another 75bps in FY16,” UBS analyst Gautam Chhaochharia said.
RBI cautioned about upside risks to inflation and revised its
forecast for January 2016 to 6 per cent (from 5.8 per cent) – the upper end of its target range. "Inflation is not structural in India and the strong disinflation process underway in India will keep showing up in positive surprises in terms of inflation data prints ahead," the report said.
Inflation still remains a worry for the central bank as it expects price rise to remain subdued till August before rising to 6 per cent by January 2016.