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In June 7 policy review: RBI likely to hold rates, focus on inflation control

According to Credit Suisse, forecast of mild growth acceleration and improved monetary policy transmission should give growth the necessary boost, thereby reducing the need for the RBI to cut policy rates further.

By: ENS Economic Bureau | Mumbai | Updated: June 5, 2016 1:33:29 am
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Reserve Bank of India Governor Raghuram Rajan is likely to maintain a status-quo on interest rates and focus on inflation control, liquidity management and the pending policy transmission in the second bi-monthly monetary policy review on June 7.

The central bank cut policy rates by 25 basis points in the first bi-monthly policy review for FY17 on April 5, 2016 and narrowed the policy rate corridor to 50 bps from 100 bps, by reducing the marginal standing facility rate by 75 bps and increasing the reverse repo rate by 25 bps. This, according to the RBI, was done to ensure better alignment of the weighted average call rate with the repo rate. However, banks are yet to pass on the rate reliefs to their customers despite the best efforts of the RBI.

“Having eased policy rates by a cumulative 150 bps over the last 18 months and with the level of rates nearing historical lows, the bar for any additional ease by RBI is climbing. A number of key uncertainties give Governor Rajan plenty of reasons to remain in a holding pattern at the upcoming Policy Review on June 7,” said Richard Iley, Chief Economist, Emerging Markets, BNP Paribas.

“The possibility of a mid-year Fed rate hike and the oil price’s rapid rebound are the external reasons for caution. The still uncertain progress of the monsoon is the key domestic factor. Our base case remains that RBI can eke out one further 25 bps rate cut later this year but the central bank will want greater certainty on these risks before pulling the trigger,” Iley said.

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Concerns with respect to food inflation are unlikely to go away, despite the prediction of an above normal monsoon. “A case in point is the sudden spike in prices of potatoes. The consumer price index inflation for April came in on the higher side at 5.4 per cent and the wholesale price index moved into the positive territory after 17 consecutive months of negative growth, both driven by food prices,” India Ratings said in a report.

Bank of America Merrill Lynch said, “we continue to highlight that lower lending rates — 50 bps estimate in April-September — hold the key to recovery. We expect the RBI’s commitment to provide sufficient durable liquidity — Rs 320,000 crore in FY17 (Rs 70,000 crore FYTD) — to result in excess credit supply that should ease lending rates.”

According to Credit Suisse, forecast of mild growth acceleration and improved monetary policy transmission should give growth the necessary boost, thereby reducing the need for the RBI to cut policy rates further.

Crude oil is going to be a big concern. “Globally the uptick in brent crude prices and domestically higher minimum support prices will also push up headline inflation. Prices of global crude oil have risen from the level of under $ 40/barrel in March 2016 to levels of around $ 50/barrel, raising concerns about a cascading implication on inflation,” India Ratings said.

Industry is pressing for a rate cut. “While monsoon, oil prices and action of US Fed are imponderables for the RBI, the time is just right for another 25 bps rate cut to give a fillip to India growth story … All forecasts so far suggest that this monsoon will be bountiful while the spurt in inflation is seasonal and inflationary pressures should ease as rains will cool off food prices,” said Rajeev Talwar, chairman, NAREDCO.

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