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The RBI is likely to keep the key interest rates unchanged in the upcoming monetary policy review on Tuesday April 1, experts say.
Radhika Rao, Economist, DBS Group said, “The RBI is unlikely to throw a spanner in the way of the equity rally and broader pre-election optimism at next week’s review. We expect the benchmark repo rate to be left unchanged at 8 per cent... Unexpected rate action at the last two reviews does infuse some uncertainty, but recent data outruns and proximity to elections lower the scope for imminent action.”
The central bank had hiked the repo rate by 25 bps in its January policy. The repo rate is the rate at which banks borrow funds from the RBI in case of a shortfall.
CPI inflation, highlighted as the preferred price gauge, slowed to 8.1 per cent year-on-year in February, down from 11.2 per cent in November. “Easing food (mainly vegetables) prices were the main drag on the headline, as the related index dipped to 8.6 per cent from a peak 14.4 per cent just three months prior. In contrast, the extent of downswing in the core CPI index has been muted, down a notch to 7.9 per cent from 8 per cent in 4Q13. This stickiness is a reflection of the still firm price pressures in the service categories, namely housing, recreation and healthcare costs, amongst others. Elevated inflationary expectations and the consequent negative impulse on household budgets are additional points of worry for the central bank,” Rao added.
Against this backdrop, the authorities are unlikely to take their eyes off price developments. The inflation trajectory is still riddled with risks on the back of recent unseasonal weather and the impact on the monsoon from a possible El Nino development. This could lead to a possible rebound in headline readings in the June/Sep14 quarters. The fiscal leaning of the newly-elected Government beyond May is also an unknown at this juncture. Hence, the path of least resistance for the central bank is to hold rates unchanged into the new fiscal year, with odds of a rate hike to increase on any potential rebound in inflation 3Q14 onwards.
According to an RBS survey, a majority of the respondents are expecting no change in the key policy rates – repo, reverse repo and cash reserve ratio.
Similarly, HSBC report suggested, “The RBI signalled in its forward guidance in January that it did not anticipate further tightening in the near term if the envisaged disinflationary process pans out. With headline inflation coming down notably and core CPI not rising further, it is likely to stick to that forward guidance next week and keep the policy rate on hold. However, the RBI is still expected to sound a hawkish tone and highlight the lingering upside risks to inflation.”
Recent remarks from RBI Governor Rajan that the policy aim was to lower inflation ‘over time rather than abruptly’, should put fears over aggressive hikes to rest. In the meantime, a conciliatory tone has also been set with the Government on the inflation-targeting debate. Any potential shift will be kept flexible and conducted in lockstep with the Government as a common mandate. Concrete steps in this direction, however, are unlikely before the next Government assumes office.
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