Next Rate Cut Depends on How Less Teary-eyed Onion Leaves RBI

Mumbai: Days after the Reserve Bank stunned the market with a status quo on the policy rates, an American brokerage has said onion prices hold the key to the next rate cut.

Onion prices, considered politically sensitive, have been spiralling for the last few weeks and have breached the Rs 200-mark in some markets.

The RBI was widely expected to cut interest rates at last week's policy, which would have made it into a sixth consecutive cut in as many policy reviews in 2019 to boost the sagging growth, that has dipped to a six-year low.

"We advise investors to track onion prices to time the next rate cut by RBI," house economists at Bank of America Securities said in a note on Tuesday.

It said onion prices have now jumped 371 percent year-on-year in December, after a 177 percent increase in November. If the prices retreat to Rs 60 a kg in December and to Rs 40 in January from the present levels, inflation should peak off at 5.9 percent in December and slip to 5.4 percent in January. But if onion price moderates to Rs 60 a kg in January, when bulk of onion imports arrive, inflation will be at 6.1 percent in January, it said.

The note, however, said its base case is for a rate cut at the next policy review in February, when it expects the headline inflation to peak at 6 percent in December or latest by January.

While holding the rates, governor Shaktikanta Das had said that the central bank was still open to cut the rates but chose to wait and watch for evolving data.

The brokerage said if the RBI is not comfortable with a negative real repo rate, which is the repo rate minus the headline inflation, the next rate cut will be in April.

However, if the rate setting panel is desirous of cutting only when the headline inflation touches 4 percent, which is the median of the target set by the government for RBI, the MPC will continue to hold till next October, it said.

A February cut will be helpful as it will come with early two months of the busy season still to go, while one in April will not be so useful as it will come ahead of the slack loan demand season, it opined.