RBI could respond with 50 bps cut in October post IIP & CPI data: Brokerages

The chatter about a bigger rate cut by the Reserve Bank of India (RBI) in October has grown louder after strong Index of Industrial Production (IIP) numbers and a rise in inflation, which touched a 10-month high, say brokerages.

India's industrial output grew 4.3 percent month-on-month (MoM) in July, data released by the government on September 12 shows. Though inflation grew 3.21 in August but is within Reserve Bank of India’s comfort zone, fuelling expectation of a bigger cut this time.

“Based on tepid CPI (consumer price index) numbers and a widening output gap, the RBI might take stronger action and reduce the rates by 50bps in its Oct’19 policy,” Emkay Global said in a report.

“We believe that growth will start showing some improvement from September before the festive season, with some pick-up in government spending along with amelioration in agri-sowing.”

Industrial output, or factory output, is the closest approximation for measuring economic activity in the country's business landscape.

A steady rise was seen in the manufacturing and mining segment but farm-related items such as harvesters and tractors continued to see a decline in July.

With further worsening of auto production, the downside bias remains high, which could lead to moderation in the PMI data, but some experts feel that some uptick could be seen from September.

“The CPI remained below the four YoY (year on year) mark for the13th consecutive month. The headline CPI tracked largely steady at 3.2% YoY. Food prices continued their trend of acceleration in August,” Morgan Stanley said in a report.

“The core inflation decelerated, core ex-gold decelerated to a 26-month low. We expect another 2-3 rate cuts through March 2020. The repo rate may be at 4.75-5 percent by March 2020.”

Retail inflation remains within RBI’s target level of 4 percent, data released by the Central Statistics Office shows. Retail inflation for July stood at 3.15 percent.

Food prices, a measure of changes in kitchen budgets, grew 2.99 percent in August, compared with 2.36 percent in July.

"With the CPI inflation recording only a mild increase in August 2019 despite the sharp uptick in the food inflation, we continue to expect the MPC to reduce the repo rate by 15-25 bps in the October 2019 policy review, given the continuing concerns related to economic growth,” Aditi Nayar, Principal Economist, ICRA Ltd, said.

“While the late surge in monsoon rains has narrowed the YoY gap in Kharif sowing to a mild 0.6% as on September 6, 2019, the flooding in certain areas has led to a continued rise in the prices of vegetables such as onions,” he said.