There is space for 25 bps cut this year: HSBC

Tuesday, 4 August,New Delhi: The Reserve Bank has space for a final 25 basis points rate cut this year, after which it will be “difficult” for it to lower rates as meeting the medium term inflation target may get harder, says an HSBC report.

Having cut benchmark lending (repo) rate by 0.75% so far this year, RBI on Tuesday kept it unchanged at 7.25% as also the cash reserve ratio (CRR) at 4% in its bi-monthly policy review meet.

If food and core prices remain soft over the next few months, global commodity prices stabilise at low levels and the US Federal Reserve action does not pose a meaningful worry, space for a final 25 bps rate cut could open up, HSBC said.

“In our view, at best, there is space for a final 25 bps cut in 4Q,” HSBC said in a research note, adding that the medium term 4 per cent inflation target by March 2018 is getting harder by the day, and will make rate cuts beyond 2015 “difficult”.

RBI Governor Raghuram Rajan said in the monetary policy review today that significant uncertainty on the factors influencing it will be resolved in the coming months, including persistence of high inflation, monsoon as well as actions by the US Federal Reserve which is expected to shift to hiking rates.

According to HSBC, the future policy action would be determined by fuller monetary transmission of the front-loaded repo rate cuts, evolution of food prices and monsoons, government action on supply side reforms including improving the quality of fiscal spend, and signals from the Fed.

The global brokerage further said that the 4% inflation target is not going to be easy, and that too at a time when growth is likely to recover.

“Furthermore, wage hikes for civil servants, short-term inflationary impact of the GST and insufficient movement on food distribution reforms, could make the target harder to achieve,” HSBC Chief India Economist Pranjul Bhandari said in a research note.