CHENNAI: With the Reserve Bank of India cutting its key repo rate by 25 basis points (bps) this week, Citigroup has said that there is room for another 25 bps easing in policy rates by September or earlier.

The brokerage has cut its FY17 consumer price index (CPI) forecast from 5.3% to 4.9% on the likely delay in implementation of 7th Pay Commission and lower service tax hike in the Union budget.

While RBI expects the impact of 7th Pay Commission to be around 100-150bps on headline CPI in 2016, Citigroup estimates the impact at 50bps. The brokerage says it expects CPI inflation to undershoot RBI’s 5% projection in January-March 2017 quarter.

“The moderate hike in minimum support price (MSP) – as imputed from food subsidy for FY17 – and normal monsoon conditions reinforce our view of another year of benign food inflation,” said Citigroup analyst Samiran Chakraborty in a research note.
Minimum support price is the minimum price paid to farmers in India for procuring food crops – an intervention by the Central government – to ensure that a steep fall in commodity prices doesn’t affect farmers.
The apex bank’s decision to ease interest rates by 25 bps will extend the rally in bonds and lower the potential floor for the non-deliverable overnight indexed swap rates in this cycle, said Citigroup, adding that it expects impact on the current to be limited with the Indian rupee’s strength more likely to be influenced by external developments and RBI’s forex reserve accumulation.
The brokerage has also said that liquidity is likely to improve, partly because of open market operations (OMO) bond purchases and the seasonal government spending at the start of the fiscal year.

[Source:- The Times Of India]