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Last Updated : Aug 14, 2020 06:14 PM IST | Source: Moneycontrol.com

RBI unlikely to cut rates in 2020 as high inflation can pressure bond yields: Experts

Barclays has revised its outlook and expects inflation to average 5.3 percent YoY in FY20-21 from an earlier estimate of 4 percent.

Sunil Shankar Matkar

India's retail inflation jumped to 6.93 percent in July as food and fuel prices picked up pace, the National Statistical Office (NSO) data released on August 13 shows, reducing chances of a rate cut by the Reserve Bank of India (RBI).

The number was higher than that for June which, too, was revised upwards to 6.23 percent from 6.09 percent earlier.

In the last two consecutive quarters (January-March of FY 2019-20 and April-June of FY 2020-21), the average consumer price index (CPI)-based inflation has breached 6 percent.

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The Reserve Bank of India has a target of keeping inflation at 4 percent within a band of +/- 2 percent.

During its policy announcement earlier this month, the central bank said it expected the headline inflation to remain elevated in the second quarter of FY 2020-21, hence a rate cut was unlikely in 2020, experts said.

"Based on our inflation trajectory, we believe that room for further cut rates will not emerge until Q1 21 when we expect one more cut," Barclays said.

At its August policy meeting, the RBI's monetary policy committee voted unanimously to hold interest rates, citing high uncertainty and rising concerns over inflation.

"The statement emphasised the need to wait for a 'durable reduction' in inflation before easing rates further, establishing the primacy of inflation over growth," Barclays said.

Rahul Gupta, Head of Research- Currency at Emkay Global Financial Services, also feels said till the consumer price index (CPI) hovered above 6 percent, the RBI would be hesitant on cutting repo rate, though with better monsoon and further easing of lockdown, inflation can be expected to come down to RBI's comfort levels.

The RBI has cut repo rate by 115 bps to 4 percent since the lockdown, which has helped the bond yields to smoothen down.

"In July, bond yields were largely stable, this negative surprise in retail inflation will further create pressure on yields," Naveen Kulkarni, Chief Investment Officer at Axis Securities said.

Food and beverage prices, which contribute more than 50 percent of the CPI basket, rose to a four-month high of 8.7 percent in July, higher than 2.3 percent in the corresponding month of FY20 and 7.9 percent in June 2020.

"The inflationary pressure in this component can be ascribed to supply disruptions owing to localised lockdowns announced in states across the country in July," said CARE Ratings.

Core inflation also scaled a 21-month high at 5.9 percent for July and this is the fourth consecutive month of pick-up, the rating agency added.

Given the multiple supply-side price shocks and higher administrative costs, Barclays revised its CPI inflation outlook for the near term. It now expects inflation to average 5.3 percent YoY in FY20-21 against the earlier estimate of 4 percent.

"The upward revisions largely reflect higher food, fuel and gold prices, while underlying inflation is expected to remain benign, given economic weakness," it said.

The research house sees the headline inflation staying above 6 percent through August and expects it to register a print lower than 6 percent next month.

"Inflation will likely fall below 4 percent by November, largely on the back of favourable base effects from 2019, when India experienced an onion price-related shock to food prices," it said.

On account of a spike in coronavirus cases in the country, coupled with localised lockdowns, CARE said inflation would continue to remain at elevated levels over the next few months, but with some moderation.

"Supply disruptions in food components will keep food prices at elevated levels. However, the release of kharif crop in the markets can ease food inflation to some extent," it said.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
First Published on Aug 14, 2020 11:06 am
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