RBI unlikely to cut rates in a hurry – SBI

State Bank of India, the country’s largest bank, said it expects the Reserve Bank of India to cut key interest rates only after sees a “sustained” downward trend in inflation, and this is likely to take at least 2-3 months more.

“We maintain that RBI may go for the rate cut in a decisive manner (50 basis point or so), but only after it is convinced that CPI downward trajectory is sustained and inflationary expectations are anchored decisively lower. This may happen materially anytime after February 2015,” SBI said in a note today.


It pointed out that the dip in whole-sale price inflation to 0% in November was largely a base-effect, with some secular component as well.

“The lowest CPI inflation in Nov’14 is mainly aided by base effect as inflation during corresponding period last year was hovering in double digit territory(11.16%). If we strip out the base effect, CPI inflation would have been at 5.4% and WPI at 1.1%,” it said.

There is a lot of debate in the market about whether the RBI should cut rates immediately or not.

However, SBI added that it was not JUST the base effect that was leading to lower inflation prints in recent months.

“As far as incremental impact is concerned, there has been a significant 220 basis point decline in retail inflation since Apr’14. Going forward, the contribution of positive base effect to CPI inflation in coming months will be only seen post Jan’15. However, in Dec’14 and Jan’15 the negative contribution of base effect to the index will be there but with much lower magnitude.”

The high-base effect, SBI pointed out, only kicked in in November.

“It is thus naive to say that base effect is pulling down retail as well as wholesale inflation, as the impact is only being felt from Nov’14 onwards (for the statistically minded, a negative base effect will only imply that such impact is pulling down inflation, and not the other way around.) However, the good thing is that we are looking at a sub 6% inflation in March 2015 itself. WPI is likely to be around 1% by March 2015.”

SBI also flagged the continued decline in industrial production, especially in the capital goods segment. Capital goods, like machinery, power etc, are the most sensitive to expectations of growth or otherwise in an economy, and have a long ‘lead time’.

India’s industrial output declined to 36-month low of 4.2% in Oct’14 primarily due to huge decline in manufacturing activity (-7.6%). However, both mining and electricity grew by 5.2% and 13.3% respectively.

“We expect this maybe the last month of decline in industrial output and going forward IIP data will inch up further… In Feb 2009, after the crisis, manufacturing had declined by 9.1%, and it was led by mostly capital goods components. As on October 2014, the decline is still being led by capital goods components. This trend is disturbing, as it indicates, investment revival still remains elusive even after 5 years,” SBI said.

It also noted that after nearly 21 months of depositors actually losing money on their bank deposits due to inflation, the returns have come back to positive territory now.

“The real interest rate is now in positive territory for last couple of months after hovering in the negative territory for nearly 21-months. As RBI left the rates unchanged and both CPI and WPI inflation moderated further, the real deposit rates reached as high as 4.44% during Dec’14 by taking CPI as proxy and 8.82% if WPI is taken as proxy.

“Interestingly, it leads to a situation, where real interest rates will be higher than nominal interest rates for most banks in the deposit category of less than 1 year (upto 90days). This is way above the 0.5% (CPI) and 1.5% (WPI) real rate prevailing on a cross cyclical basis in India,” it added.

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