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The Reserve Bank of India is likely to keep interest rates unchanged in the second bi-monthly policy review scheduled for June 7. The central bank may, however, adopt a dovish tone to reflect ebbing inflation risks, according to market experts.
While retail inflation fell to a low in April 2017 and the GDP growth slowed sharply in the fourth quarter of 2016-17 — suggesting that the time may be opportune to cut rates — the central bank may prefer to wait it out. The RBI will be watchful for data on the impact of the implementation of Goods and Services Tax (GST), trajectory of the monsoon and the effects of the house rent allowances under the 7th Central Pay Commission award before taking a call on a rate cut.
The RBI last cut its repo rate or the repurchase rate (the interest rate at which it lends funds to banks to overcome short-term liquidity mismatches) from 6.50 per cent to 6.25 per cent in the October 2016 policy review. Since then, there have been three policy reviews, but the central bank has kept its policy rate steady.
Naresh Takkar, Managing Director and Group CEO, ICRA, said, “CPI inflation has remained below 4 per cent, which is the RBI’s the medium-term target, for six consecutive months… The Monetary Policy Committee (MPC) may choose to observe the actual progress of the monsoon and the adjustment during the transition to the GST, prior to reducing the policy rate or reversing the stance back to accommodative from neutral. Therefore, we expect the MPC to opt for a pause in the June 2017 policy review.”
However, the tone of the upcoming policy review is likely to be less hawkish than the April 2017 policy document and the minutes of the MPC meeting, which may lead to some softening of bond yields, he added.
Abheek Barua, Chief Economist, HDFC Bank, observed that, overall, while he does not expect the RBI to reverse its neutral policy stance based on just Q4 (January-March 2017) growth data, the MPC is likely to take note of the distinct slowdown and could sound less hawkish in its commentary in the upcoming policy meeting.
A Nomura report said it expects the RBI to stay on hold until March 2018, but hike by a cumulative 50 basis points starting in April 2018.
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