RBI likely to pause rate-cutting cycle in August but it'll be short-term: Nomura

Financial holding company Nomura has said the Reserve Bank of India is expected to put a pause in its rate-cutting cycle in August, though it could be short-term. It said the mounting risks on growth implied the rate-cutting cycle was not yet over. "We continue to expect a cumulative 50bp in additional rate cuts, delivered in October and December (25bp each)," a research note, Asia Insights, by Sonal Verma of Nomura said.

The report said the CPI inflation was on the upside at 6.1% y-o-y in June compared to 6.3% in May, and a high of 7.2% in April. In addition to the higher base in April, the upside surprise in June inflation was largely driven by non-food categories, the credit rating company said. "While the spike in April raised the base for a higher inflation trajectory for forthcoming prints, the June reading also saw higher core inflation, with escalations particularly in the pan, tobacco & intoxicants, education, and personal care categories," it added.

Nomura said headline inflation was expected to remain sticky at 6% levels over the next couple of months and may average at 5.7% in Q3, down from 6.5% in Q2. "We expect headline inflation to dip to 2.5-3.0% levels in Q4 and Q1 of 2021. This will most likely be driven by a sharp correction in food & beverages inflation, especially in Q4, although core inflation is likely to remain sticky. Overall we expect headline inflation to average 5.5% in 2020 and 4.4% in FY21," it said.

The government data released on Monday stated retail inflation, measured on the basis of Consumer Price Index, stood at 6.09 per cent in June. This is beyond the 6 per cent upper margin mandated by the Reserve Bank of India. The government had not released headline retail inflation data for April and May this year, citing a lack of price data due to coronavirus lockdown. However, in April, the Ministry of Statistics and Programme Implementation (MOSPI) had revised CPI inflation numbers for March to 5.84 per cent from 5.91 per cent.

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