Goldman Sachs sees RBI cutting rates by 0.5% starting February

Goldman Sachs Global Macro research on Monday changed its forecast on the possibility of Reserve Bank of India (RBI) cutting rates.

The group now expects the RBI to cut its key lending rate, repo, by 0.5 percentage point beginning February changing its earlier call of status-quo in rates in first half of next calendar year.

“We expect the RBI to cut by 25bps each in February and April. The main driver of this view is our commodities team’s forecast of weak oil prices through 2Q2015,” economists at Goldman said.

“The recent sharper than expected fall in headline inflation, contained core prices, and no sharp increase in food prices despite a weak monsoon buttress the change in our rate view,” they said.

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Further, the agency has cut its fiscal year2016 Consumer price index Inflation (CPI) forecast substantially, to 5.8 percent from 7.0 percent earlier.

“We do not think the RBI will launch into an even more aggressive rate cutting cycle due to entrenched inflationary expectations, uncertainty about commodity prices, and the need to establish the credibility of the new inflation targeting framework,” it said.

The RBI has so far rejected the calls for a rate cut from government and industries citing high inflation as a greater threat. However, both the retail and wholesale inflation has eased in the recent months.

While CPI inflation fell to 5.52% in October, wholesale inflation declined to 1.77% in October.

In a column last week, FirstBiz had argued that the sharp fall in inflation was partly dues to the base effect and the central bank might prefer to wait till March to see a clear trend in inflation before easing rates.