Softening trend in inflation leaves door open for rate cut: DBS

The RBI may consider chopping interest rate in the coming three months as inflation may slip below 5 percent during September-December period, before inching up in the following quarter, says a report.

According to global financial services major DBS, the softening trend in inflation leaves the door open for a rate cut in the fourth quarter of this calender year "with odds of a move in October on the rise".

"A benign inflation path going forward and likelihood of a dovish policy committee leaves the door open for further easing but this needs to be balanced off with firmer demand dynamics and risks of US rate normalisation as the September Federal Open Market Committee (FOMC) meeting approaches," DBS said in a research note.

The next RBI policy review meet is scheduled for October 4. It would also be the first review under the new RBI Governor Urjit Patel, who assumed charge on September 4, after the end of Raghuram Rajan's three-year tenure.

Rajan had faced criticism for his reluctance to cut rates, though he always maintained that the rates were lowered at every given opportunity.

According to DBS, there is a likelihood that the wholesale price index might outpace retail inflation over the next few months, akin to the trend in 2011, before evening out.

Moreover, replenishment of reservoir levels has been encouraging, which in turn is positive for availability of ground water and farm output, it said.

Besides, sowing activity has gained traction, with the total area sown up 4 percent from the same period last year, led by a sharp increase in pulses (36 percent year-on-year), rice (14 percent), cereals and oilseeds.

"These trends are relevant in light of the recent pick-up in CPI inflation (primarily food inflation) and expectations of better agricultural production lifting GDP growth this year," DBS said.