HSBC: September CPI data solidifies December rate cut call

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HSBC said in a note on Thursday that the faster than expected fall in Consumer Price Index based inflation in September has solidified its 25 basis point rate cut call for December. "The RBI's assessment that real neutral rates in India may have fallen a notch over time, and the clarification that the central bank is targeting inflation more flexibly (in the 4%, +/- 2% band) are also supportive of our rate cut call," it said. HSBC sees the CPI inflation remaining in a comfortable range - undershooting the Reserve Bank of India's 5% target of early-2018, and averaging 4.75% over the next 12 months. Data released Thursday showed that consumer inflation fell sharply for the second month in a row in September, touching a 13 month low. The consumer inflation stood at 4.31% in September compared with 5.05% in August and 6.07% in July. The decline was due to a steep drop in food inflation to 3.88% in September .. from 5.91% in August. However, the horizon beyond the 25 basis points rate cut is hazy due to policy-related upside risks to inflation in the second half of 2017 such as the second round effects of the government wage hikes and a temporary spike in inflation if GST rates are over 18%, said HSBC. "In light of these risks and the RBI’s desire to eventually move towards the mid-point of the 4 percent +/-2% band, we expect the 25 bps rate cut in December to be the last in the cycle," the bank said.

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