India data builds case for rate cut before Christmas

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Rapidly cooling inflation is building the case for the Reserve Bank of India (RBI) to cut interest rates as soon as its next monetary policy meeting on December 2, say economists.

Consumer prices rose a slower-than-expected 5.5 percent on year in October, following a 6.5 percent increase in the previous month, led by a fall in local food prices. This was the slowest pace since the index was launched in January 2012.

Inflation is now well below the central bank's target of 8 percent for January 2015 and even dropped below the 6 percent target for January 2016.

The data indicates "interest rate cuts are likely to come onto the agenda sooner than most currently seem to expect, perhaps even as early as the RBI's next meeting in December," Shilan Shah, India economist at research firm Capital Economics wrote in a note.

Consensus expectations are for the first rate cut to come in the second quarter of next year, according to Capital Economics.

India's benchmark repo rate has been unchanged since January, when the central bank increased it by a quarter percent point to 8 percent.

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Shah is not alone in his rate outlook.

"The data is in line with our view that the RBI will cut rates in December," Dariusz Kowalczyk, senior economist and strategist, Asia ex. Japan, Crédit Agricole said in a note published after the inflation figures were released.

Not so fast

However, not all economists were convinced the recent let up in price pressures would be enough to make the central bank budge.

"The recent moderation in CPI inflation and our expectation of continued disinflation in 2015 does not change our view on monetary policy," said Sonal Varma, chief India economist at Nomura.

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"In our view, the RBI is focused on ensuring that inflation remains low even as the growth cycle starts to pick up in 2015-16. This requires continued vigilance from the RBI given elevated inflation expectations in India," she said. "It also requires not overreacting to any short-term undershooting on inflation for cyclical reasons."

Tushar Poddar, managing director, Global Macro Research at Goldman Sachs, has a similar stance, noting that while easing inflation increases the probability that the "RBI may start giving a larger weight to growth concerns rather than a single-minded focus on inflation", December is too soon for a rate cut.

"Given the helpful base effects in the October and November readings, still elevated inflation expectations, as well as uncertainty regarding the sustainability of weak commodity prices, we expect the RBI to remain on hold in the December meeting," he said.