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More rate cuts unlikely this year, reforms the key: HSBC

The central bank is not likely to go for further easing this year as weak rains may have a tangible impact on food inflation and could directly impact rural household consumption, an HSBC report has said.

The global financial services major has cautioned that El Nino risks are not to be underestimated, and going by the updates from across the world, El Nino conditions are likely to last longer and possibly intensify into the second half of this year.

Weak rains would have a tangible impact on food inflation and directly affect rural household consumption, HSBC said, adding that the magnitude of the impact would depend on how the government carries out its “food management” processes.

HSBC’s Chief India Economist Pranjul Bhandari expects no further easing this year, and believes any more rate cuts hinge on structural reforms, including food infrastructure and agricultural policy.

In case monsoon fears come true, the central bank has indicated that the monetary policy would hinge on the government’s response to it.

RBI has said: “A conservative strategy would be to wait, especially for more certainty, on both the monsoon outturn as well as the effects of government responses if it turns out to be weak.”

Meanwhile, RBI has raised its inflation forecast to 6 percent by January 2016 – slightly higher than the 5.8 percent forecast in April.

In the policy review on June 2, RBI cut benchmark rate by 0.25 percent for the third time this year to spur investment and growth, but hinted that there may not be any more reduction in the near term.

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