The Wholesale Price Index or WPI inflation rose to 6.84 percent in February after falling to a three-year low of 6.62 percent in January. Although, the recent figure is higher than analyst estimates, softening core inflation has raised hopes of a rate cut in the Reserve Bank of India’s upcoming monetary policy review on March 19.
Sajjid Chinoy of JP Morgan told CNBC-TV18 a rise in fuel and food prices have been the main drivers of inflation in February. He further added that though, food inflation remains worrying, the central bank will be looking to ease rates in its next policy meet. Besides, tight liquidity is a major concern and therefore, RBI may consider a cash reserve ratio or CRR cut along with a repo rate cut.
Chinoy further added, "I do believe that a lot of this moderation in the year-on-year wholesale price index (WPI) rate is because of large favourable base effects. We will see inflation perhaps go down to 6.2 percent next month because there is a massive base effect in March. When these wear off in the month of May and if at that point you have got any kind of pick up in consumption demand, my worry is, in the second half of the year inflation could again begin to tick up. It won’t be sharp, but it could again begin to tick up."
Neeraj Gambhir of Nomura India on the other hand advocates a 25 basis point repo rate cut. According to him, the liquidity deficit is temporary and therefore, the RBI may not look at a CRR cut.
"The reason for that is the liquidity deficit in the system seems to be temporary and we expect a lot of the government money which was currently with the RBI will be spent towards the first couple of weeks in April. So, if anything, there could be potentially a 25 bps rate cut," explained Gambhir.
As far as the bond market is concerned, Gambhir expects a rally from current levels. But, the main issue facing the bond market remains the supply calendar for next year. "I think the issue that the bond market is going to be grappling with is how is the next year supply calendar going to look like? What is the overall size of borrowing program for the first half compared to redemptions that are there and how is that supply calendar and switching program is going to be absorbed by the market. I think the market has to content with not just the rate cut action but also the large supply," he elaborated.