Inflation woes to dampen rate cut pitch

* Reserve Bank of India unlikely to ease policy stance amid drought scare

Written by ENS Economic Bureau | New Delhi | Published: July 27, 2012 1:00:20 am

Expectations of a rebound in inflationary pressures,along with fears of an impending drought across the country,could queer the pitch for an easing of the RBI’s monetary policy stance in the first quarter review on July 31.

According to the reports released by research firms on Thursday,in the last few quarters,companies in India have raised concerns over the high borrowing costs denting their margins,coming in the wake of the RBI having hiked key policy rates 13 times since March,2010.

“Food inflation,which is already high,will face further pressure due to poor rainfall. The prices of pulses and coarse cereals,which are rain-fed crops and for which no buffer stocks exist,could flare up as a result. In addition,prices of oil seeds are expected to rise further because of lack of adequate sowing due to lower acreage. This will push up the WPI based inflation beyond the 7.0 per cent that we have forecast in our base case scenario,” says Crisil in its research report titled,‘Monsoons-2009 situation yet again’

In its ‘banking and finance report and monetary policy expectations’ issued today,ICRA said it maintain its forecast that average inflation of 7.0-7.5 per cent in the current fiscal would limit the space available for further monetary easing to around 50-75 bps over the remainder of 2012-13.

ICRA expects the RBI to retain the policy rate in the near term until monsoon-related concerns are assuaged.

“In the absence of an improvement in the monsoon performance in the coming 2-3 weeks,inflationary pressures are likely to intensify for pulses and oilseeds. A hardening of inflationary expectations as a result of a weaker-than-normal monsoon performance has emerged as a significant risk.”

HSBC chief economist for India and the Asean,Leif Eskesen,in a report titled ‘India Central bank Watch’,said,“We believe RBI will remain ‘on hold’ to further monitor global developments and the summer monsoons,not following the lead of some of its Asian peers. It will closely watch decisions out of Delhi,with efforts to bring fiscal consolidation and structural reforms back on track also key determinants of any future monetary policy action.”

According to ICRA,the RBI might prefer taking the open market operations (OMO) route rather than the cut in cash reserve ratio (CRR) in the upcoming review. “The RBI is likely to address frictional liquidity pressures over the short term through further OMOs rather than a reduction in the CRR,thereby retaining headroom for CRR reduction to address any liquidity stress arising as a fallout of global events,” the agency noted.

In its mid-quarter review in June,the RBI had said that the evolving growth-inflation dynamic will continue to influence its stance on interest rates.

“Future actions will depend on a continuing assessment of external and domestic developments that contribute to lowering inflation risks,” the central bank had observed.

EGoM on drought to meet next week

An Empowered Group of Ministers (EGoM) on drought will meet on Tuesday to review the monsoon situation,as 22 per cent deficit rains so far have affected sowing of Kharif crops,particularly coarse cereals. “I have planned EGoM on drought on coming Tuesday,” Agriculture Minister Sharad Pawar,who was recently made head of EGoM on drought,said. PTI

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