RBI likely to cut interest rates again next month

The Reserve Bank of India headquarters in Mumbai. India’s central bank will cut key rate by another 25 basis points to 7.25% before its scheduled meeting on June 2, according to a Reuters poll.

Reuters/Bengaluru, IndiaIndia’s central bank is likely to cut interest rates again next month, with analysts polled by Reuters forecasting a strong probability that will act ahead of scheduled policy meetings, as it has done so far this year. Economists polled over the past week gave a 60% median probability that the Reserve Bank of India will cut by another 25 basis points to 7.25% before its scheduled meeting on June 2 after two similar cuts in January and March. A more than 50% collapse in crude oil prices since last June has helped drive down inflation pressures around the world, allowing the RBI to seize opportunities to ease policy. Last month, consumer price inflation hit a three-month low of 5.17%, well within the RBI’s comfort zone and below even the 6% it was targeting for January 2016. Wholesale prices fell in March at their fastest rate in nine years. “With softening inflation there are chances that the RBI may provide a further cut to the policy rate. Lending rates are still high in India,” said Prashant Sawant, senior analyst at Maplecroft.  Even economists who said they were sceptical another rate cut was in the pipeline in the first half of the year acknowledged there is little standing in RBI Governor Raghuram Rajan’s way. “Given the timing of the first two rate cuts, another out-of-policy rate cut may not be ruled out,” said Prerna Singhvi, an economist at Religare Capital. The Reuters poll predicted one more follow-up cut by the end the year, bringing the main policy rate down to 7%.  The poll forecast inflation averaging 5.4% in 2015-16, relatively low by recent standards but still much higher than inflation in China. “India has benefited greatly from lower oil prices, which have prolonged the improvement in the trade balance and pushed inflation down sharply,” noted Richard Iley, Chief Asia Economist at BNP Paribas. With India’s economy now outperforming most of its emerging market peers, it is expected to grow by 7.4% in the 2014-15 fiscal year and 7.8% next, according to the poll.  That is higher than the 7% and 6.8% growth rates forecast for China this year and next.  India’s official economic data series were revamped by government statisticians in March to align the figures to a global standard of measuring gross domestic product, which added around 2 percentage points to growth.