CPI inflation to remain low, reports HSBC

New Delhi: The Reserve Bank is expected to meet its target 'comfortably' as CPI inflation is likely to remain well below 5 per cent over the first half of 2017, an HSBC report says.

According to the global financial services major, food prices have remained low over the first 10 days of December and it is getting increasingly likely that the RBI will meet its '5 per cent by March' CPI target comfortably.

"We expect CPI inflation to remain well below 5 per cent over the first half of 2017," HSBC said in a research note. Retail inflation fell to a two-year low of 3.63 per cent in November following the Centre's demonetisation drive that led to lower consumer spending on various food items including vegetables.

The report further said that demonetisation has clearly hurt activity as effective cash in circulation has contracted 60 per cent over the last month. "All the activity data we have available for the period post November 8 (the day demonetisation was announced) suggests that things are weaker on the ground," HSBC said and added, "We expect GDP to grow 5 per cent in the current quarter and 6 per cent in the next, before it gradually normalises towards the 7 per cent ballpark."

Regarding the Reserve Bank's monetary policy stance, the report noted that the RBI will likely cut the policy repo rate by 25 bps in the February meeting. "Despite RBI's pause last week, subdued prices and weak activity will likely culminate in a 25 bps repo rate cut in the February meeting," HSBC noted.

On December 7, RBI kept interest rate unchanged despite calls for lowering it while it slashed the economic growth projection by half a per cent to 7.1 in the first policy review post demonetisation.

Even as RBI sharply lowered its real GVA forecast for FY2017 by 50 bps to 7.1 per cent, it noted that the revision is largely owing to the downside surprise in 2QFY17 (July-September). The next monetary policy meet is on February 8.