Reserve Bank Seen Holding Rates Till March: DBS

Mumbai: The Reserve Bank of India (RBI) is unlikely to cut the interest rates this fiscal year as the retail inflation trajectory may be distorted by base effects over the next six months, according to a research report by DBS.

"Assuming the present CPI targets are maintained, we expect the status quo on the rates to extend through March 2015 and perhaps significantly further into the year," the Singapore brokerage said in a report on Friday.

The RBI has set a glide path for consumer price index-based, or retail, inflation at 8 per cent for January 2015 and 6 per cent for January 2016.

The report sees retail inflation in September easing to 7 per cent from 7.8 per cent in August.

Inflation readings are expected to soften further in October and November, reaching 6 per cent, with core inflation already slipping to fresh lows, it said, adding "Falling inflation is encouraging but part of this is due to base effects."

Due to last year's exchange rate volatility and high vegetable prices such effects imply considerable volatility between October this year and March 2015.

"The initial downswing will take inflation to 6 per cent by November, with downside risks, owing to moderation in fruits and vegetables prices. However, fading base effects thereafter will take headline inflation back to 8 per cent by March 2015," DBS said.

The magnitude of rebound in retail inflation would also be influenced by the filtered-through impact on food prices from uneven southwest monsoon and an unexpected jump in global commodity prices, the report noted.

The report further said there is also some scope that the RBI's on-hold stance is maintained through the first half of next fiscal year with rate cuts likely in the second half subject to its inflation outlook and the direction of the US interest rates, which are likely to climb steeply from April next.

American brokerage Bank of America-Merrill Lynch had earlier this week said it expected the apex bank to lower rates by 75 basis points in 2015, beginning February, as it sees inflation peaking at 8 per cent in January 2015 and 6 per cent in January 2016.