With pressure on prices due to demonetisation, RBI may cut interest rate by 25bps in December review meeting, says HSBC

Reserve Bank is likely to go for a 25 bps rate cut this fiscal as it is all set to easily achieve the inflation target in view of the Centre's demonetisation move that may put additional downward pressure on prices, says a report.

According to global financial services major HSBC,inflation momentum remained comfortable for both consumer and wholesale prices and the October inflation print confirms that RBI's upcoming inflation target will be easily met. "The government's newly announced demonetisation schemeis likely to put additional downward pressure on growth and inflation over the next year," HSBC said in a research note adding that it expects a 25 bps rate cut this fiscal.

Softening food prices helped ease retail as well as wholesale inflation in October, raising hopes that RBI may go in for another rate cut in its monetary policy review next month. Retail or CPI inflation dipped to 14 month low of 4.20per cent in October, while the one based on wholesale prices or WPI fell for the second consecutive month to 3.39 per cent for the same month.

"Looking at the recent trajectory and softening global oil prices, CPI inflation is likely to undershoot RBI's 5 percent target of early-2018 by a hefty margin," the report said. Moreover, the recent demonetisation of high-denominated currency is likely to lower growth and inflation. "This makes us more confident of our call of a 25 bps rate cut in this fiscal year.

However, the timing of the ratecut will depend on market volatility around the US Fed'supcoming policy meeting and India's demonetisation scheme. "If volatility rises the RBI may choose to push out therate cut to February," HSBC said. The Monetary Policy Committee headed by RBI Governor Urjit Patel last month cut benchmark interest rates by 0.25 per cent to 6.25 per cent.

The next RBI policy review is on December 7.