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With retail inflation ruling above the Reserve Bank of India’s (RBI) projection of around 5 per cent for FY2017, outgoing Governor Raghuram Rajan is unlikely to give a parting gift in the form of a repo rate cut at the third bi-monthly monetary policy review on August 9.
Going by the latest government data, the year-on-year retail (consumer price index-based) inflation reading came in higher at 5.77 per cent in June 2016 as against 5.40 per cent in June 2015. CPI is used by the central bank as a nominal anchor in formulating monetary policy.
In a recent speech, Rajan, whose three-year term ends on September 4, said: “…the RBI has emphasised the fight against inflation, and a key element of any disinflationary process is to curtail aggregate demand.
“…We have cut interest rates by 150 basis points since January 2015. With CPI inflation currently close to the upper bound of our inflation target, few could sensibly argue that we have not been adequately accommodative.”
State Bank of India Chairman Arundhati Bhattacharya observed that vegetable prices had actually increased the inflation (CPI number).
“Already, vegetable prices are declining. As this declines, we believe the RBI’s inflation target will be achieved. And if that happens then we are looking at some cuts.” She said a rate cut of about 25 basis points could happen by September-October because by that time Kharif crops would have entered the market.
In the financial year so far, the RBI has pared the repo rate (the interest rate at which the central bank provides short-term liquidity to banks to help them overcome liquidity mismatches) by 25 basis points from 6.75 per cent to 6.50 per cent. The RBI had cut the repo rate in its first bi-monthly monetary policy review, in April.
Status quo anticipated Economists at HDFC Bank, in a research report, opined that given that headline inflation (which measures overall inflation in the economy and includes volatile components such as food and energy prices) still remains above the RBI’s target of 5 per cent, further room for policy rate cuts is rather limited.
“We expect the RBI to maintain status quo in the August meeting and anticipate only one 25 basis points rate cut in the remaining part of FY2017,” it said.
With the government setting the inflation target at 4 per cent (plus/minus 2 per cent) until March 2021, effective August 5, Kotak Securities, in a note, said it expects the RBI to remain focused on achieving an inflation rate closer to 4 per cent.
“This necessarily will imply that the scope for rate cuts is limited…We expect the RBI to remain on pause in the August 9 policy,” it said.
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