The third consecutive rate cut announced in June was the first time since 2013 amid a widespread slowdown in the economy.
The brokerage firm listed three significant reasons for a rate cut: CPI inflation was well below the RBI’s target of 4 per cent, RBI’s accommodative stance and clear evidence of a slowdown in the economy.
“Despite firming up, June CPI inflation remains well below the RBI target of 4%. Even though food inflation is gradually rising, moderate core inflation is expected to keep a check on the headline number,” the report said.
“Government’s adherence to fiscal prudence and MPC’s acknowledgment of the fading growth impulses strengthen our belief of another 25 bps cut in August. Further cuts would hinge on the growth-inflation mix,” said the report.
Kotak also said that the actual impact on inflation, will depend on the total kharif supply, the government’s procurement ability and the status of monsoon.
“Unless there is a major supply shock, we do not envisage a sharp pickup in food inflation. After a slow start in June, the sowing activity is expected to pick up in July and August with the advancement of the monsoon,” Kotak said.
Core inflation broadly remained unchanged at 4.1 per cent in June. On a sequential basis, too, it remained flat and the Index of industrial production (IIP) growth softened to 3.1% in May owing to a unfavourable base effect.