Reserve Bank of India
India reported a fall of $1.46 billion in its foreign exchange reserves for the week ended Feb. 19. Picture: Reserve Bank of India (RBI) logo pictured outside its head office in Mumbai, India.REUTERS

The Reserve Bank of India (RBI) is expected to cut key lending rate by 25 bps in the current fiscal year, despite a recent spike in inflation rates, according to a global brokerage firm.

The central bank is likely cut policy rate further by 50 bps in the next fiscal year, said the Swiss brokerage UBS.

"We reiterate that 75 basis points more repo rate cuts are likely -- 25 basis points by end-FY16, another 50 basis points in FY17, versus no cuts expected by the street over the same period," NDTV Profit quoted UBS, as saying.

At the September meeting, RBI governor Raghuram Rajan had announced larger-than expected repo rate cut of 50 bps, taking the overall reduction in lending rate to 125 bps so far in 2015.

A measure of retail inflation inched up to 5% in October, led largely by an increase in prices of pulses, which went up by over 33%. However, the inflation is still below RBI's estimate of 5.8% in January 2016.

The wholesale price index rose to minus to 3.81% in October from minus 4.54% in the previous month, but remained in negative territory for the 12th consecutive month. The spike in both the inflation rate has lessened the chances of RBI rate cut at its next meeting in December.

But the UBS forecast of additional 25 bps cut this fiscal year is based on lower inflation in the second half of the fiscal year, which is seasonally weak period for consumer prices to edge up even in case of "double-digit inflation."

"Our analysis of seasonality and political economy implies that there remains potential for positive surprise from lower inflation in the second half of this fiscal," it added, according to NDTV Profit. 

UBS said that a rise in demand for food items is "structural" and it is not food price inflation, as there is a shift in demand for protein food.

"Supply has responded to demand growth. In our view, food inflation reflects more the political economy," it said.

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