Analysts see Rajan not cutting rates despite cooling inflation

Official data released on Wednesday showed the retail inflation cooled down to 8.1% for February

Even after a positive surprise on retail inflation, analysts on Thursday said they expect Reserve Bank of India Governor Raghuram Rajan to hold the key rates in the policy announcement on April 1.

“We expect RBI to maintain interest rates status quo in the policy announcement next month to ensure the decline in inflation continues before the monetary policy looks to promote growth,” ratings agency CARE Ratings said in a note. Foreign brokerage HSBC said emergence of pleasing data and the likelihood of RBI holding its key rate on April 1, should not lead to believing the rate tightening cycle is over.

Official data released on Wednesday showed the Consumer Price Index (CPI)-based inflation cooled down to 8.1 per cent for February as against 8.79 per cent in January, while the Index of Industrial Production came to a positive side in January, at 0.1 per cent after three months of continous decline.

Under Rajan, the central bank has raised rates three times or 75 basis points (bps) to 8 per cent with an eye on the inflation number, the last one in January. The central bank has also made its intentions of focussing more on the CPI number very clear. It has also set itself a target of bringing down the CPI to 8 per cent by January 2015 and get it down further to 6 per cent by 2016.

“Retail inflation is now already close to the RBI's target of 8 per cent for January 2015. Sustaining it at these levels however, will be crucial given the upward momentum in inflation of certain food categories,” rating agency CRISIL said in a note.

On the future trajectory of the monetary policy, brokerage Credit Suisse said it expects no major actions till the September quarter, where the RBI will do a 0.25 per cent hike in the repo rate and follow it up with similar actions in the December and March quarters with theJanuary 2016 target of cooling CPI inflation down to 6 per cent in mind.

Its peer BNP Paribas also said even though there may have been some respite on the price rise front, the risks from inflation continue being elevated and the RBI will “retain a tightening bias for the foreseeable future.”