Expect RBI to cut rates by 25 bps on Apr 5: Sajjid Chinoy

The baseline estimation is 25 basis points (bps) interest rate cut by the Reserve Bank of India (RBI) at its policy meeting on April 5, says Sajjid Chinoy of JP Morgan says. However, he does not rule out even a 50 bps cut.

With the food inflation contracting nearly 500 bps over last one year, Chinoy says there is growing conviction that some structural fixes have played out well.

He expects more rate cuts in the second half of the year once better clarity emerges on state budgets and deficits, monsoon and food price trajectory.Below is the transcript of Sajjid Chinoy’s interview with Ekta Batra and Anuj Singhal on CNBC-TV18.Ekta: First your take on the Consumer Price Index data (CPI) data at 5.18 percent and what do you think the Reserve Bank of India (RBI) could do? Could it be a 50 basis point rate cut that we could see on April 5?A: What was notable in the CPI data is that food prices remain contained across the board whether it was vegetable prices, pulse prices, high protein prices again began to mean revert. And if you just step back a second and look at how food inflation is evolved, despite the fact that you have had two successive droughts, you have had a 500 basis point fall in food inflation last year from 11 percent to 6.6 percent. Now, this year, year ending FY16m, food inflation is running at 5.1 percent in the month of February. So, the larger picture here is that with every month that food prices remain contained, despite four successively bad crops, there is a growing conviction here that there are some structural fixes that have clearly helped, maximum selling prices (MSP) have clearly helped. So, that gives the central bank and policy makers more confident that while some of this clearly cyclical, global food prices are down 20 percent as well. That must have contributed, some of this is structural as well. So, that for me is the big take away.The second part is core inflation has remained around 5-5.5 percent for the last 16 months. It was about 5.4 percent in yesterday’s print as well, same as last month. Momentum ticked up a little bit. So, on the whole, a positive surprise driven largely by food, core stays where it has. To your point on the RBI’s action, precisely for the reason that core remains flattish and above the medium-term target given that commodity prices have risen, oil is up almost 20 percent since the last policy review. I suspect that the RBI will cut rates by 25 basis points and hold some ammunition for the future. They would want to see how commodities evolve. They would want to see how the monsoon pans out and they would want to have more conviction that the 5 percent target for next March is under control before cutting again. So, you cannot rule out a 50 basis point cut especially after what the government did on the central government budget. But our baseline call is for 25 basis points of easing.Anuj: You pre-empted my question actually. I wanted to know what was the chance of a 50 basis point rate cut, but after this 25 is done in April, how much more ammunition do you think would be left with RBI based on the current data that we have now?A: The RBI made it very clear that both fiscal policy and just the data outlook will drive policy going forward. The first thing we look for in March is how the state budgets are panning out, because the issue is that even though the central government deficit has consolidated, all of it is asset sales, so the underlying fiscal stance is neutral, we would want to see to what extent state deficits are widening. That is something that the RBI will take into account going forward.Secondly, it is really going to be on how the inflation prints pan out. So far, our expectation is that given the price movements in early March, the March CPI would be below 5 percent. Now, if that were to be the case, the first quarter CPI will be running below the RBI’s baseline trajectory and that would give it some comfort, but that maybe offset by the fact that you have got commodities that have rallied meaningfully in the last three weeks. So, in the second half of the year, once the RBI is convinced that the monsoon is normal, the pressure on food prices could be downward, they need more conviction that the 5 percent target for next March which is not trivial will be met. Last year, when you had a series of rate cuts in the first half of the year, it was A] because you were at the start of the cycle and B] because you were running 200 basis points below the first inflation target of 8 percent. So, they will want to get closer to 5 percent, be sure they are going to fit that and then perhaps, cut by another 25 basis points later in the year if the data so allows it.