RBI to cut rates by 50 bps in FY14: Citi India

The rupee is expected to be in the 54-56 trading range this fiscal, says Rohini Malkani, economist at Citi India. Talking to CNBC-TV18, she says she expects RBI to cut rates by 50 basis points in FY14, given the fact that growth trends are below par, coupled with the fact that core inflation is coming down.

Below is the edited transcript of her interview with CNBC-TV18 Q: The rupee has depreciated significantly. While the government hopes to stem the currency’s fall, the efficiency of the measures are questionable. In the backdrop of where the rupee is today, do you think the Reserve Bank of India (RBI) will present us with a status quo policy? A: Our view is that we do expect the RBI to cut rates by around 50 basis points in FY14. This is that given the fact that we are seeing growth trends being sub par, core inflation is coming down and the output trend in the Purchasing Managers' Indices (PMI) is weak. So, we are maintaining our estimate of 50 basis points rate cut. As regards to the timing, given the fact that we have seen recent rupee volatility coupled with the fact that we expect the trade numbers for the coming month to also remain weak and that fact that the latest consumer price index (CPI) trend remains sticky we do expect to see a pause on Monday and with the RBI most likely to cut rates in its next meeting in July. Q: So you don’t expect a rate cut come the June 17. You believe the RBI will be forced to halt because of where the rupee is. What is the target at Citi as far as the rupee goes? We have seen a sharp turnaround today, but where do you see the currency headed? A: Our house view is of the rupee being in the 54-56 trading range in this fiscal year FY14. However, if we do see extended dollar strength, that could see that range being widened a bit. Q: Let me get the macro numbers that were out on Wednesday. Index of industrial production (IIP) has come in at measly 2 percent; below estimates, CPI inflation higher than estimates. Are you changing the inflation trajectory for the year? A: As regards inflation, we are looking at a wholesale price index (WPI) to average around 5.5 percent in FY14 and the CPI to kind of come in, in the 7.5 percent range. There are a couple of factors at play. One, we expect that good monsoons will positively impact food prices. Secondly, lower commodity prices will help. However, we have to keep a track of future developments in the rupee.