Money & Banking

RBI likely to keep rates on hold, say economists

Our Bureau New Delhi | Updated on January 12, 2018 Published on June 06, 2017

BL07_BNK_RBI

A file photo of RBI Governor, Urjit Patel.

A 25-bps cut is likely in October when the inflation picture becomes clearer, says rating agency CARE’s Chief Economist Madan Sabnavis

The RBI, in its second bi-monthly monetary policy review to be announced tomorrow (June 7), is likely to keep rates unchanged, according to most economists.

Rating agency CARE’s Chief Economist Madan Sabnavis said in a report that he expects a 25 basis point (bps) cut in October when the inflation picture becomes clearer.

For now, he expects no change in repo rate at 6.25 per cent, although CPI inflation is down, oil prices are stable and there is moderation in commodity prices.

Bank of America Merrill Lynch Economist Indranil Sen Gupta expects the RBI to turn dovish on Wednesday in order to be open for a 25 bps cut in its next review in August, provided rains are normal.

This, he felt, would signal a much-needed bank lending rate cut before the busy industrial season sets in during October. Although slow growth and soft inflation provide conditions for a cut now itself, he expects the RBI will wait for clarity on the monsoon as well as transfer of the demonetisation dividend, which it estimates at around ₹60,000 crore.

“We are tracking May CPI inflation at about 2.5 per cent, with daily data showing food inflation continuing to fall even in June on a good summer rabi harvest. The India Met has also grown more confident of its 96 per cent normal rainfall forecast, with monsoons hitting the Kerala coast. Core CPI inflation has also slipped to a low 4.1 per cent.

“Second, we do not see the output gap closing any time soon with high rates constraining old GDP series growth, at a sub-potential 5.5-6 per cent. Finally, we do not see material risk of second round inflation effects from the house rent allowance (HRA) hikes by the Seventh Pay Commission as the first round effect itself was mostly statistical,” Sen Gupta said in a report.

Bank of Baroda’s Chief Economist BS Misra, however, expects a 25 bps cut in policy rate tomorrow, citing the subsiding of inflationary pressure and the fact that growth needs a shot in the arm.

He said the on-time arrival of monsoon, the inflation neutral GST rates, cautious approach of the US Fed to further hikes and soft oil prices, which are expected to be range-bound, augur well for a cut in rates now.

Published on June 06, 2017
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