'Rate cut likely in March if budget addresses fiscal issues'

RBI
The RBI is likely to cut interest rate in its next policy meet on March 19 provided government delivers a "credible budget" addressing fiscal consolidation and continues with the reform push, an HSBC report says.

"The RBI is likely to take some comfort from the decline in WPI inflation. In turn, this has increased the odds of another rate cut in March, if Delhi continues to deliver its bit," HSBC said in a research note.

"The delivery of a credible budget targeting fiscal consolidation and a continuation of the structural reforms push...remain important pre-conditions for monetary easing," HSBC said.

The wide current account deficit is another important consideration for monetary policy deliberations, it added. WPI inflation in January hit 3-year low of 6.62 percent.

In its January 29 policy review, RBI after a 9-month long hawkish monetary policy stance, slashed its key interest rates by 0.25 per cent.

"The RBI will, therefore, continue to tread carefully," HSBC said, adding that there still are pent-up inflation pressures in the economy that are not fully reflected in either the WPI or the CPI.

Subsidised fuel and other administered prices yet to be fully adjusted to reflect international commodity prices. It added. "The expected 50 paise monthly adjustment in diesel prices will add to the inflation print, although only in a phased manner," HSBC said.

Led by oil and gold imports, current account deficit (CAD) which occurs when a country's total imports of goods,

services and transfers is greater than the country's total export of goods, services and transfers had touched a record high of 5.4 per cent of GDP in July-September quarter.

The trade deficit in January widened to USD 20 billion in January, the second highest rise ever in a month. The biggest trade gap of USD 21 billion was recorded in October, 2012.

The RBI has also expressed concerns over high CAD and said a high CAD will threaten macroeconomic stability and impact growth.

"Large fiscal deficits will accentuate the CAD risk, further crowd out private investment and stunt growth impulses," RBI had said in its third quarter monetary policy review.

Meanwhile, Bank of America Merrill Lynch in a report said that RBI will switch to supporting growth from exclusively fighting inflation and is is expected to "prepone" policy rate cuts (by 0.25 per cent each) on March 19 and May 3.

According to the report, RBI has a six-month window as inflation will likely pierce 7.5 per cent in the second half this year on hikes in diesel prices and power tariffs.

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