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Uncertainty about the progress of the monsoon and its likely impact on retail inflation could see the Reserve Bank of India (RBI) keep its policy repo rate unchanged in the third bi-monthly monetary policy review to be announced on Tuesday.
Market players feel that the central bank may prefer to wait till September (for the fourth bi-monthly monetary policy review) before taking a call on cutting the repo rate.
By then more clarity could emerge on a host of factors, including whether the RBI’s retail inflation (based on the Consumer Price Index) projection of 6 per cent by January 2016 can be met. The RBI last cut the repo rate, which is the interest it charges banks for short-term funds, from 7.50 per cent to 7.25 per cent on June 2. It then stated that there was a case for a cut in the rate due to low domestic capacity utilisation, still mixed indicators of a recovery, and subdued investment and credit growth.
“In the last policy, the RBI’s prognosis of inflation was 6 per cent by January 2016. If that doesn’t change towards the lower side, there is no justification (for the rate cut) from that perspective.” said Ashish Parthasarthy, Treasurer, HDFC Bank.
Other factors“The US rate hike is also very much still on the table. On the monsoon front, the jury is still out on how good or bad it is going to be,” he said, adding that the RBI would rather hold the rates and wait for the next policy because there is no clarity.
However, Parthasarthy felt that policy rates could come down by at least 50 basis points over the next 12 months.
HSBC economists Pranjul Bhandari and Prithviraj Srinivas, in a note, said they expect the RBI to hold rates at the August meeting and reiterate its data-dependent stance.
“If rains remain non-disruptive, space for a final 25 basis points rate-cut could open, but no more, unless structural reforms pick up,” the HSBC note states.
Deutsche Bank economists Taimur Baig and Kaushik Das, in their report, observed that if food prices start easing sharply from September, in line with past trends, then hitting the 6 per cent (CPI inflation) target will not be difficult.
“But the food price outlook comes with a great degree of uncertainty, which is why we think the central bank will prefer to maintain a conservative stance at this stage.
“We are calling for a 25 basis points rate-cut in the September-end policy review, but we acknowledge that this could get postponed to the end of the year or early next year if the food price dynamic turns out to be unfavourable in the months ahead,” the Deutsche Bank report adds.
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