RBI to wait for ‘clearer read’ before cutting rates in Q2 2015

New Delhi: The Reserve Bank is likely to cut policy rates by 50 basis points starting from the second quarter of 2015, as base effects for industrial production and inflation normalise over the coming months, a report says.

According to the global financial services firm HSBC, the Central Bank would wait for a "clearer road" on trends before cutting rates in the second quarter of 2015. "As both the IP (industrial production) and inflation prints were clouded by base related quirks, we expect the RBI to wait for a clearer read on trends before cutting rates in 2Q 2015," HSBC said in a research note today.

According to official figures, industrial production contracted by 4.2 per cent in October, sharpest decline in three years, on poor show by manufacturing sector and dip in the output of capital as well as consumer goods. The decline in industrial production could partly be attributed to larger than expected impact of Diwali related base effects, the HSBC report said, adding that there could be some comfort next month given the manufacturing PMI for November has shown a healthy uptick.

Meanwhile, according to the Consumer Price Index data,cheaper food items helped retail inflation drop to a new low of 4.38 per cent in November, the fifth consecutive month of decline. This declining trend in year-on-year inflation is likely to end this month, as favourable base effects wear off and the pass through of weaker oil prices is limited due to fuel tax hikes, HSBC said.

"As base effects for both IP and CPI normalise over the coming months, the RBI can get a cleaner read on trends before changing its policy stance. We think the RBI will cut policy rates by 50 bps starting 2Q (second quarter) 2015," it said. At the monetary policy review on December 2, RBI Governor Raghuram Rajan chose to hold rates, saying it is premature to go in for a cut, but painted an optimistic picture, saying inflation is coming under control.