Over the last couple of years, the central bank has not cut rates significantly for a wide variety of reasons. Even though core inflation (non-food manufacturing inflation) started softening a while ago, the central bank held on to rates as both fiscal and current account deficits along with consumer price inflation stayed above its comfort zone. Now, it seems that the central bank will have little reason to justify its hawkish stance on rates.
For starters, the fall in crude oil and gold prices would have a positive impact on the current account deficit. Lower crude oil prices have the potential to shave off 50 basis points from the headline inflation print during the course of the year. Barclays expects the current account deficit to moderate to more than 3% of GDP over the next three years, which is much worse than the long term average of 1.5%. Siddhartha Sanyal and Rahul Bajoria of Barclays Economics Research expect the commodity import bill to moderate in the near term, reflecting a relatively benign commodity price outlook, subdued domestic growth and likely softer inflation.
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