RBI rate cut may be further delayed: Citi

Will the Reserve Bank of India cut it policy rate, at least in the next rate setting meeting?

Very unlikely, says Citi said in its report after the release of HSBC manufacturing Purchasing Managers’ Index today. It expects the rate easing to get further delayed.

The HSBC manufacturing Purchasing Managers’ Index (PMI) rose to 55.0 in June, a four-month high, from 54.8 in May. It has kept above the 50 mark that divides growth and contraction for more than three years, Reuters reported earlier today.

While the growth outlook is weak with the monsoon playing truant, price trends are sticky. Given RBI’s priority to tackle inflation even if it means sacrificing growth, monetary easing may be delayed further, the research report said.

[caption id=“attachment_364201” align=“alignleft” width=“380” caption=“Input and output prices rose significantly, with input prices hitting a nine-year high of 65.1 points. Reuters”] [/caption]

Though there was an increase in output - up 2.1 points to 58.5 - the data paints a grim picture of future production, it said.

New orders, new export orders, quantity of purchases, and backlog of work were down. “These indicate subdued demand trends both on the domestic and external fronts,” the report said.

Input and output prices rose significantly, with input prices hitting a nine-year high of 65.1 points. Much of this appears to have been passed on to consumers with output prices rising 1.7 points to 59.5 - the highest levels seen since April 2005," the report said.

This means there is unlikely to have a let up in the inflation scenario. With the RBI time again indicating that its priority is inflation and the economy may have to sacrifice growth to bring down inflation, it is very unlikely that the central bank will cut its policy rate in the next policy review on 31 July.

“With inflation likely to remain sticky and rating actions coupled with the RBI’s latest policy stressing on the need to address supply-side imbalances, this once again put the onus on the govt to create a positive investment environment and implement tax and subsidy reforms,” the report said.