Economy

Monetary policy: Rajan may maintain status quo on key rates

Beena Parmar Mumbai | Updated on January 22, 2018 Published on November 29, 2015

RBI Governor Raghuram Rajan

Will wait for the US Fed decision

RBI Governor Raghuram Rajan may adopt a wait-and-watch approach in the upcoming monetary policy, maintaining a status quo on the interest rates.

While the RBI had front-loaded a 50-basis point booster dose cut in the previous policy, most bankers and analysts are not expecting any change in the repo rate on Tuesday.

The thing to watch out for, therefore, will be RBI’s guidance ahead of the US central bank meeting and concerns over an uptick in inflation remain.

Rajan will announce the fifth bi-monthly monetary policy review on December 1. Currently, the repo rate (rate at which banks borrow short-term funds from RBI) stands at 6.75 per cent. 

The Cash Reserve Ratio (CRR), part of bank deposits to be kept with RBI, is also likely to remain unchanged at 4 per cent.

“One of the reasons (for the status quo) is that Rajan has already front-loaded the cut in the last policy. US Fed tip-off is expected and he will see how the market will behave. Third, the Budget is due in February so he will wait to see how the Pay Commission impact will be factored in before taking the next action. Fourth, the transmission of previous rate cuts is yet to happen,” said NS Venkatesh, CFO of IDBI Bank. A report by Citi group said that the impact of the 7{+t}{+h} Pay Commission on the Budget also warrants a cautious stance.

The US Federal Reserve is expected to effect its first hike in nearly a decade at its two-day meeting from December 16. The US repo rate has been at 0-0.25 per cent since the 2008 global credit crisis.

Ashish Parthasarthy, Head Treasurer at HDFC Bank, said: “No major change has taken place from what was earlier. If at all, it has only worsened.”

Amid weak monsoons and high retail food prices, inflation has been inching up in the last three months. After touching lows of 3.6 per cent earlier in the year, annual consumer price inflation rose to 4.41 per cent in September and jumped to 5 per cent in October.

Arundhati Bhattacharya, Chairman of State Bank of India, also said she does not expect any rate cut in RBI’s credit policy.

Concern over inflation

In the last policy, RBI had said inflation was expected to reach 5.8 per cent by January 2016. Venkatesh said the guidance will be key in this policy on Tuesday. “I am looking forward to the guidance. I expect a dovish outlook as it will be accommodative stance for promoting growth and the markets will cheer. He will continue to be pro-growth.”

Analysts have also ruled out any change in interest rates after the surprise 50 bps cut in the fourth bi-monthly policy in September end.

Industry body Assocham expects global factors among others to influence the RBI decision.

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Published on November 29, 2015
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