Rate cut expectations rise after inflation surprise

The unexpectedly sharp fall in the wholesale inflation for April has prompted many economists to change their policy rate cut views, according to a Reuters poll on Thursday.

In the fresh poll, seven out of 14 economists who had earlier said the Reserve Bank of India would not ease policy at a June 17 meeting now do expect a cut in the repo rate.

They changed their view following Tuesday's inflation announcement and RBI governor Duvvuri Subbarao's subsequent remarks that he was "very happy" about the number and "will take note of softening inflation".

The previous poll was published on April 22, before the RBI cut the repo rate by 25 basis points to 7.25 per cent on May 3, while warning of little room for further easing.

In April, the headline inflation unexpectedly fell below 5 per cent, the RBI's comfort zone, for the first time in more than three years.

The 10-year benchmark bond yield fell as much as 12 basis points on Wednesday to 7.35 per cent, its lowest since December 2009, propelled by Subbarao's comments.

Anubhuti Sahay, senior economist at Standard Chartered in Mumbai, said that April's far bigger-than-expected correction in inflation and the soft global commodity prices have "improved the outlook for another rate cut in the June policy meeting".

Earlier, the British bank had not expected a June rate cut.

"Also, even as April trade deficit was bad, it was more of a one-off in nature. With growth still weak, we can expect more monetary accommodation from the RBI," Sahay said.

Thursday's poll also showed that eight of 12 respondents expect the repo rate to be 6.75 per cent or lower when the fiscal year ends in March 2014. Most of the respondents had previously expected the repo rate to be at least 7 per cent by end-March, according to the earlier poll.

Copyright: Thomson Reuters 2013