RBI unlikely to cut rate despite easing inflation: Ind-Ra

India Ratings and Research (Ind-Ra) expects the Reserve Bank of India (RBI) to maintain status quo in its monetary policy review next month even though a downward trend in retail inflation was witnessed in the past four months , the agency stated in a press release. 

"Ind-Ra believes the RBI cut the policy rate in October 2016 review in anticipation of retail inflation easing in the ensuing months. In other words, as the RBI front-loaded the rate cut, it may now like to wait and watch how the retail price inflation trajectory evolves before taking any further decision on the policy rate" said the ratings agency. 

Further on, it said that the RBI may closely track the impact of demonetization, in expectation of banks to transfer the decline in Marginal Cost of Funds based Lending Rate (MCLR) to customers due to a surge in bank deposits. The agency believes that a marriage of demonetization and decline in inflation rate will provide more momentum in the domestic bond market. 
 
Consumer Price Index (CPI) moderated to 4.20% in October from the previous months rate of 3.4% while Wholesale Price Index (WPI) moderated to 3.4% in October 2016 from 3.6% in September. Both CPI and WPI moderated over the softening in food price inflation. Retail food inflation moderated to 3.3% year on year in October 2016 from 3.96% in the previous month over a sharp decline in the prices of pulses together with a moderation in the prices of vegetables and fruits. Retail pulses inflation declined to 4.1% in October from 14.3% in September 2016 with the kharif crop harvest gradually coming into the market. Wholesale inflation in pulses moderated to 4.7% in October from 5.06% in the previous month.

Retail pulses has a more pronounced decline in comparison to wholesale inflation because the latter had already reacted to the new arrival, as evidenced by the sharp decline in September pulses inflation over August 2016. 

Ind-Ra said that food items like sugar, eggs, meat and fish still were areas of concern albeit the declining trend in food component. Cereals were another area of concern as even though its inflation softened in the wholesale market from 9.51% in August to 6.13% in October, it saw an increase in the retail market from 4.1% to 4.4% in the same months. 

The agency said, "Food inflation will remain soft in the coming months in the wake of a good kharif harvest and setting in of winter. However, the disruption caused by demonetization of Rs 500 and Rs 1,000 notes could lead to some temporary spike in food inflation." 

Wholesale fuel inflation increased from 5.6% in September to 6.2% in October and wholesale manufactured food products inflation had a double-digit inflation for the fourth consecutive month at 10.5% in October. Ind-Ra stated that this even though a moderation in cyclical components of food inflation like pulses, fruits, vegetables positively impacted food inflation, considering fuel and manufactured food products inflation, upside risks to inflation cannot be over looked.  
 
The agency said that there is likely to be a disinflationary impact as the economic activity is having a downward bias and the full impact of demonetization may later open up room for further monetary accommodation.

Commenting on the bond market, Ind-Ra said that while the shorter end of bond curve will benefit since banks prefer investing in short tenor assets as the system transitions to new currency notes, the longer end of the curve, will be more reflective of global risk preferences and outlook on the US Fed rate trajectory.

Commenting on the rupee, the agency said that with increased probabilities of a Fed rate hike in the December 2016 policy, the dollar index has surged to 100.23 from 97.5 since November 1, and the rupee will trade with a weakening bias in the near term. "Ind-Ra, however, believes that the better placed domestic fundamentals will aid resilience of rupee, compared to other emerging market currencies."