The Reserve Bank of India is likely to go for a 25 bp cut sooner than later, said State Bank of India (SBI). Additionally, for better transmission to happen, yields should also decline, it said. "This may happen if the government starts spending directly rather than auctioning the cash balances, and that getting indirectly injected into the system," it opined.
Direct spending always has a larger multiplier impact rather than indirect, money for which may be used for other purposes. Also, with CPI likely to undershoot, there could be a further space for an additional 25 bps monetary accommodation in the remaining part of the year, the bank said
SBI said, "Concerns of unseasonal rains, weak monsoon, strengthening crude prices, rupee depreciation and MSP increases impacting inflation trajectory may be unfounded and unsubstantiated by simple arithmetic."
While weak monsoon may not impact food inflation in a year of bulging stocks (remember 2002, 2004 and even 2014), crude prices increase as well as rupee depreciation may not materially impact wholesale prices (because of continued weak pass-through) as also retail prices (because of lower weight: 15% impact over last year), it opined.
Further SBI said, "MSP increases also look a marginal threat with current MSP actually higher than world food prices (remember such price provides a support to farmers). Interestingly, WPI and CPI next month will trend even lower (WPI close to negative 3%, while CPI at close to 4.5% or so)."