Rating agencies expect RBI will maintain status quo on interest rates

With retail inflation as measured by the consumer price index easing to 8.1 per cent in February 2014, credit rating agencies expect the Reserve Bank of India to maintain the status quo on interest rates in the upcoming policy review.

According to Naresh Takkar, MD & CEO, ICRA, “Consumer inflation eased to 8.1 per cent in February 2014, close to the target of 8.0 per cent for the end of this calendar year suggested by the Urijit Patel Committee.

“As a result, we expect a status quo on the policy rate in the upcoming policy review.”

Takkar, however, pointed out that damage to standing crops following excessive precipitation this month is likely to arrest the three-month trend of declining headline inflation.

Moreover, early concerns have emerged regarding the strength of the monsoon in 2014, which could have a negative impact on the inflation trajectory.

“However, at this stage, these concerns may be premature to necessitate a monetary response and instead warrant action from various levels of Government in terms of preparedness to deal with the eventuality of an unfavourable monsoon,” said Takkar.

Madan Sabnavis, Chief Economist, CARE Ratings, in a note said although inflation is on the desired path now, the RBI is expected to still maintain the status quo on interest rates in the policy announcement on April 1 to ensure that the decline in inflation continues before the monetary policy looks to promote growth.

Ever since he assumed charge as RBI Governor in early September 2013, Raghuram Rajan has increased the repo rate (the interest rate at which banks borrow short-term funds from the central bank) thrice by 25 basis points each to 8 per cent. The increase in the repo rate was to curb inflation and inflationary expectations.

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