The Reserve Bank may shift the monetary policy stance to “neutral” by June and deliver rate cuts starting August this year, a Japanese brokerage said on Monday. Pointing out to softer core inflation ‘or price rise in items excluding food and fuel’ in the data released for December, Nomura said there is a need for the policy to pivot towards an easier regime after the extended pause.
The brokerage reiterated its earlier view of rate cuts being expected from August onwards, and pegged the quantum of cuts at 1 percentage point.
“We expect 1 per cent of rate cuts cumulatively starting August, with a change of stance to ‘neutral’ in Q2, with risks skewed towards earlier easing,” its analysts said.
The core inflation for December came at 3.8 per cent, the note said, adding that the annualized growth of super-core inflation has dipped below 3 per cent by its estimates which is a “positive surprise”.
For January, the headline inflation is likely to cool-off to about 5 per cent, while the core is pegged at 3.5 per cent.
There is a need to pivot towards an easier regime, the note said, adding that the RBI may opt for making the liquidity less tight, change stance to neutral and also deliver on the rate cuts as part of this.
“Overall, the December CPI data were softer than expected, with the incremental pick-up driven by a rise in some food categories. Core inflation remains largely contained and underlying measures suggesting continued softness,” it said, adding that there are calmer waters ahead.
The note also said that even though growth is strong for now, there is a need to watch out for risks going ahead.
