“The RBI‘s assessment that real neutral rates in India may have fallen a notch over time, and the clarification that the central bank is targeting inflation more flexibly (in the 4%, +/- 2% band) are also supportive of our rate cut call,” it said.
HSBC sees the CPI inflation remaining in a comfortable range – undershooting the Reserve Bank of India’s 5% target of early-2018, and averaging 4.75% over the next 12 months.
Data released Thursday showed that consumer inflation fell sharply for the second month in a row in September, touching a 13 month low. The consumer inflation stood at 4.31% in September compared with 5.05% in August and 6.07% in July. The decline was due to a steep drop in food inflation to 3.88% in September from 5.91% in August.
However, the horizon beyond the 25 basis points rate cut is hazy due to policy-related upside risks to inflation in the second half of 2017 such as the second round effects of the government wage hikes and a temporary
spike in inflation if GST rates are over 18%, said HSBC.
“In light of these risks and the RBI’s desire to eventually move towards the mid-point of the 4 percent +/-2% band, we expect the 25 bps rate cut in December to be the last in the cycle,” the bank said.