‘There’s still room for rate cuts... inflation is headed lower’

Mumbai: Inflation is expected to trend lower toward the last quarter of the financial year, boosting the likelihood of a calibrated resumption in rate easing by the central bank, country treasurer at Bank of America Jayesh Mehta told ET.

Higher inflation is a temporary phenomenon, caused by supply-side disruptions due to the pandemic. “There is still some room for rate cuts despite the fact that there might be some temporary disruptions due to higher food and fuel inflation,” said Mehta. Inflation is headed lower in the first and second quarters of 2021, Mehta said.

He said he would expect at least a 50-basis point drop in benchmark yields and 25-basis point cut in the repo rate.

“A lower interest rate is crucial for growth and will help people survive in the aftermath of the pandemic,” he said.

The market expects the Reserve Bank of India (RBI) to come out with some sort of a rationale for its policy decisions to comfort the market participants that are otherwise making their own interpretations.

“In these uncertain times, it’s best for the RBI to provide clarity,” Mehta said. “If we do not see some support from the RBI ahead of the policy meeting, then yields may start inching up.”

The benchmark bond yields rose seven basis points in the past two trading sessions, pulling prices down.

Meanwhile, he does not expect the credit growth to pick up immediately as many companies and individuals are struggling with their existing credit.

“At this juncture, unless the business confidence comes back, it is unrealistic to expect capex to begin,” Mehta said. In absence of the usual business, companies are borrowing more for working capital. Hence, credit growth is unlikely to pick up in the current year.