Rate cut connotes sustainability of disinflation: CRISIL

CRISIL Research has come out with its opinion on Monetary policy. "RBI's surprise cut shows sustainability of disinflationary trend", says the research firm.

January 15, 2015 / 19:03 IST

CRISIL Research's Monetary policy Opinion

The Reserve Bank of India (RBI), in a surprising and beyond-policy-meeting announcement, cut the repo rate by 25 basis points from 8% to 7.75%. Consequently, the reverse repo adjusted to 6.75% and the marginal standing facility to 8.75%. The cash reserve ratio (CRR) was kept unchanged at 4% of net demand and time liabilities (NDTL).

The RBI indicated that disinflationary developments along with the government’s resolve to adhere to its fiscal deficit target provided headroom to cut rates. Going ahead, the RBI said “once the monetary policy stance shifts, subsequent policy actions will be consistent with that stance”. We expect the central bank to cut rates by 50-75 basis points over the next fiscal. The speed of the cuts will hinge on continued fiscal consolidation, and measures to improve the potential of the economy so that higher GDP growth does not set off fresh price fires.

We expect inflation, which has fallen below the RBI’s expected trajectory in recent months, to average 5.8% in 2015-16. A sharper-than-expected decline in the prices of fruits and vegetables, lower inflation in cereals, fall in commodity prices and weak demand conditions restraining core inflation have all navigated the headline indicators lower. The trend also offsets another negative impact, albeit a statistical one: the favourable base-effect of the past few months ended in December, which saw CPI inflation at 5% and WPI inflation at 0.11%.

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