RBI cut coming in June despite subdued CPI?

April CPI on Monday came in below RBI's medium-term target of 4% for the ninth consecutive month. At 2.92%, inflation in April was only 6 bps higher than in March and marginally lower than the consensus estimate of 3 bps. Core Inflation (excluding food and fuel) fell to a 1.5 year low of 4.6% in April, down 40 bps from March. It is therefore not surprising to see calls for a rate cut in June gathering momentum.

The economy is throwing tantrums of its own. Quarterly numbers of FMCG companies have shown that top line numbers are under pressure. Auto numbers have taken a deep dive with dealer inventory mounting. Aviation has shown a multi-year low despite being one of the fastest growing market. Liquidity is getting tightened within MSME space with funding not easily available leading to job losses. A survey by Credit Suisse had discovered that Indian propensity to postpone the purchase of durables had nearly doubled in the last 1 year. That is also slowing down the demand for white goods. People are more willing to put off their purchases to a future date rather than take on liability when the situation is uncertain. The traditional liquidity crunch during election time is also adding to the problem of taking a decision on rates.

 However, the case for a rate cut in June is not an easy one for the following reasons:

1. CPI remains broadly in line with RBI's Apr-June estimate of 2.9%. Room for further easing does not exist on that parameter.
2. Vegetable Index of CPI surged 2.9% m/m in April. This was second consecutive rise suggesting that vegetable prices may have begun to rise after bottoming.
3. CPI food index was up 1% m/m in April which will influence RBI's inflation projections and reinforces MPC's notion that soft food inflation "may not persist for long"
4. Crude oil basket rose 6% m/m in April. However, the retail petrol price was increased by only 0.6%. The situation will change once last phase of polling is over on 19th May.
5. Reports of new UBI scheme along "with universal debt relief scheme" have also emerged, details of which will be clear only after July Union Budget.
6. After 2 consecutive rate cuts in Feb and April, further rate cuts amid several uncertainties seems tad too aggressive.
One last word - MPC may take up the idea proposed by RBI Governor Shaktikanta Das to go for policy changes not in multiples of 25bps. If MPC remains on board for this, then rate cuts less than 25bps is not out of the question for June meeting!


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