Inflation is likely to be in the range of 6.5-7.6 per cent during next few months and the moderation is expected to prompt the Reserve Bank of India to cut policy rates by 100 basis points during 2012, according to global finance major Citigroup.

“Given the strong base effect, we expect headline inflation to continue to print lower in the 6.5-7.6 per cent range in the next few months against the 9 per cent plus levels seen over the last two years,” Citi Investment Research & Analysis said in its report ‘India Macro Flash’.

“Lower core inflation print, coupled with deceleration in growth supports our view of the RBI easing the repo rate by a minimum 100 basis points in 2012,” it added.

The report, however, said that the central bank’s rate cuts will begin only in April.

“Given that the RBI has said that the quantum and timing of rate cuts would be dependent on fiscal consolidation, we expect the repo rate to be cut post the Budget (due on March 16), that is, RBI’s April 17 annual policy review,” Citi said.

The RBI hiked key policy rates 13 times, totalling 350 basis points, between March 2010 and October 2011 to tame inflation which was near double-digit during most of the last two years.

However, inflation fell to a 26-month low of 6.55 per cent in January and the RBI has hinted that it may go in for rate cuts if inflation remains at moderate levels for some time.

India Inc has blamed tight monetary policy for lower investments and industrial slowdown.

Earlier this month, the Advanced Estimates released by the Central Statistical Organisation (CSO) said that growth in 2011-12 will slip to 6.9 per cent, the lowest in three years, on the back of slowdown in manufacturing and agriculture.

The economy had expanded by 8.4 per cent in 2010-11.

“Given tight liquidity conditions, the odds favour continued recourse to Cash Reserve Ratio cuts at the March Policy,” Citi said.

In the third quarterly policy review last month, the RBI injected Rs 32,000 crore into the system by lowering the CRR by half-a-percentage to 5.5 per cent.

The report, however, cautioned that inflation is likely to remain above the RBI’s comfort zone of 4-5 per cent in near future.

”... trends would likely remain higher than the RBI’s comfort zone of 4-5 per cent due to the structural factors impacting inflation, suppressed fuel prices... and interplay of commodity prices and currencies,” it said.

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