RBI Set To Cut Rates In December: Kotak Institutional Equities

New Delhi: The government's demonetisation measure will lower aggregate demand in the short term and this may prompt the Reserve Bank of India to support the economy through possibly "front-loaded" additional rate cuts, says a report by Kotak Institutional Equities.

According to Kotak Institutional Equities, the central bank is all set to cut rates in December.

"We retain our view of 25 bps rate cut in December but do not rule out frontloaded 50 bps cut to account for the expected demand hit due to demonetisation," Kotak Institutional Equities said in a research note.

Retail or CPI inflation dipped to a 14-month low of 4.20 per cent in October, while the one based on wholesale prices or WPI fell for a second consecutive month, to 3.39 per cent in October.

"CPI inflation is near its trough and we should expect a slight pickup towards 4.5-5 per cent range in the fourth quarter of this fiscal," the report said, adding that overall comfortable inflation dynamics should set up the RBI for a 25 bps repo rate cut in December.

The demonetisation measure will lower aggregate demand in the short term as the economy adjusts to short-term pains in transactions. Further downside to growth owing to slowdown in real estate and related sectors, retail trade, and some consumer durables cannot be ruled out.

This is likely to prompt the RBI to support the economy through possibly front-loaded additional rate cuts, the report said.

"This supports the probability of a 50 bps rate cut in December, though our base case continues to be a 25 bps rate cut," it added.

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.