Lower inflation will lead to cut in RBI rates

New Delhi: Moderation of March CPI inflation to a four-month low will provide support to the MPC to continue to ease its monetary policy to tackle the Covid-19-related economic shock, Kotak institutional equities has said in its report on Indian economy.

It said that since the brokerage expects FY2021 GDP growth to fall to 0.4 per cent, another 50 bps of repo rate cut with greater focus on unconventional measures to support the economy and financial markets could be expected from MPC.

"We expect the MPC to derive some comfort from the favourable medium- term inflation trajectory. Since we expect FY2021 GDP growth to fall to 0.4 per cent, we expect another 50 bps of repo rate cut," the report said.

March CPI inflation moderated to 5.91 per cent as against 6.58 per cent in February amid favourable base effects and falling momentum. The softening was led by lower food inflation of 8.8 per cent (10.8 per cent in February) owing to moderation observed across vegetables, meat and fish, eggs and fruits.

March CPI inflation moderated to the lowest level in four months owing to softer food prices, but remains above the RBI's comfort zone of 4 per cent. While supply disruptions could keep the near-term headline inflation trajectory above 5 per cent, we expect the MPC to focus on addressing the growth concerns, the report said.

Even though economic activity remains weak, core inflation rose marginally to 4 per cent (3.9 per cent in February) primarily due to higher inflation in the personal care segment (8.8 per cent from 6.9 per cent) probably led by higher gold prices.