RBI gets more room to cut policy rates as March CPI inflation further eases

Moderation of March inflation based on consumer price index (CPI) to a four-month low will provide support to the Reserve Bank of India’s Monetary Policy Committee (MPC) to continue to ease its monetary policy to tackle the Covid-19-related economic shock, Kotak institutional equities has said in its report on the Indian economy.

It said that since the brokerage expects financial year 2020-2021 GDP growth to fall to 0.4 per cent, another 50 basis points or 0.5 per cent of repo rate cut with greater focus on unconventional measures to support the economy and financial markets could be expected from the MPC.

“We expect the MPC to derive some comfort from the favourable medium- term inflation trajectory. Since we expect FY2021 GDP growth to fall to 0.4 per cent, we expect another 50 bps of repo rate cut,” the report said.

March CPI inflation moderated to 5.91 per cent as against 6.58 per cent in February amid favourable base effects and falling momentum. The softening was led by lower food inflation of 8.8 per cent (10.8 per cent in February) owing to moderation observed across vegetables, meat and fish, eggs and fruits.

March CPI inflation moderated to the lowest level in four months owing to softer food prices but remains above the RBI's comfort zone of 4 per cent. While supply disruptions could keep the near-term headline inflation trajectory above 5 per cent, we expect the MPC to focus on addressing the growth concerns, the report said.

Even though economic activity remains weak, core inflation rose marginally to 4 per cent (3.9 per cent in February) primarily due to higher inflation in the personal care segment (8.8 per cent from 6.9 per cent) probably led by higher gold prices.

Earlier, the RBI announced a slew of measures which led to an injection of an additional Rs 3.74 lakh crore into the system – amounting to nearly 2 per cent of the GDP to combat the severe economic impact in the wake of the spread of the novel coronavirus..