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RBI likely to cut interest rates early next month: CARE Ratings

The Reserve Bank of India is very likely to start cutting India’s key interest rates early next month, CARE Ratings said after India’s December consumer inflation number came in at a manageable 5%.

It was widely expected that the recent fall in consumer inflation could undergo some reversals in December and January, and the falling trend was not a sustainable one.

india-consumer-price-inflation-2015-char

However, CARE said the latest print indicated that it was indeed a sustainable decline.

“Despite the low base effect in December ’14, CPI inflation stands well within RBI’s target of 8% by January 2015. This implies that prices are indeed cooling down,” it said.

“Further, there has also been some cushion from the global slide in oil prices. Thus, we expect the RBI to cut the policy repo rate by at least 25 basis points in the next policy review to be held in early February ‘15.”

The Reserve Bank of India, under governor Raghuram Rajan, has been adopting an extra-tough stance on inflation, and has refused to cut rates over the past one year despite slowing economic growth.

India’s retail inflation was regularly hitting two digits, which had prompted the RBI to raise interest rates in a desperate effort to contain inflation. With inflation eating into cash returns, India has seen the emergence of asset bubbles, especially in real estate and gold.

While gold bubble has started deflating, real estate bubble is expected to start unraveling, albeit slowly, this year.

According to government numbers, December 2014 inflation came in below market expectations at 5% on a year-over-year basis. While CPI inflation did increase from 4.4% in the previous month, the fears of the phasing out of the high base effect were negated. Core inflation (excluding food and fuel products) came in at 0.4% over the previous month.

The food, beverages and tobacco segment of the CPI recorded a significant rise in inflation from 3.5% in November ’14 to 5.0% in December ’14, CARE pointed out.

Inflation in fuel and light was almost flat at 3.4% while ‘clothing, bedding and footwear’ segment recorded a modest deceleration in consumer inflation.

‘Cereals and products’, ‘egg, fish and meat’ and ‘milk and milk products’ underwent a marked slowdown in inflation.

Inflation in ‘pulses and products’, ‘ non-alcoholic beverages’ and ‘sugar’ was largely recorded at the same level as in the previous month indicating that prices have been virtually constant.

‘Vegetables’ and ‘fruits’ witnessed a significant increase from -10.9% to 9.6% and 13.7% to 14.8% respectively. “The reversal of the high base effect appears to have had a bearing here,” CARE Ratings pointed out.

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