Street expects RBI to hold rate for entire year

60% respondents to a Business Standard poll don't see a change in repo before March-end

The current financial year might end up being the first in seven years to see the Reserve Bank of India (RBI) keeping the benchmark repo rate unchanged, indicates a Business Standard poll among 15 financial experts, days before the central bank’s review of its monetary policy.

As many as nine respondents — all leading names in the public sector, private and foreign banks, as well as other financial intermediaries — said RBI would hold the repo rate at eight per cent at least until the end of March 2015.

There are, of course, a few bravehearts who are betting on a repo rate cut of 25 basis bps (four of the 15) to 75 bps (one) and even 100 bps (one).

The repo rate — the rate at which banks borrow from the central bank — was last kept unchanged through a financial year in 2007-08, at 7.75 per cent.

Most respondents explained why they did not expect a rate change by saying though the retail inflation rate, the RBI’s new benchmark, had fallen below eight per cent, the target of achieving a six per cent rate was a big challenge.

The Urjit Patel committee’s report, released in January, had suggested that the consumer price index-based inflation needed to be brought down to eight per cent over a period not exceeding 12 months, and to six per cent over  24 months.

According to experts, the central bank might prefer to wait for more clarity on the US Federal Reserve’s interest rate actions after the latter has completely wound down its monthly bond-buying programme. Another aspect weighing on the RBI’s stance could be an early outlook for monsoon in 2015.

“The six per cent retail inflation target will not be on the horizon at least until March. Besides, there is a need to factor in an eventual rate increase by the US Fed. That might be another reason to push back rate cuts in India,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

At the end of a two-day meeting of the Federal Open Market Committee (FOMC) a few days earlier, Fed released quarterly economic and interest rate projections by its policy makers. These suggested a faster pace of rate increase than envisioned in earlier projections.

RBI Governor Raghuram Rajan had last Monday said inflation was still high and there was no point in lowering interest rates to see it (inflation) picking up again.

Some say there could be a rate-cut possibility in the earlier part of next financial year. “There is a high possibility of RBI easing its stance in early 2015-16. That could lead to rate cuts,” said Manish Wadhawan, managing director and head of interest rates (global markets) at HSBC India. According to Wadhawan, RBI would like to see half way through the glide path of its six per cent inflation target.

Though there also a few optimists, they are in a small minority. “We expect a rate cut of 25 basis points in the fourth quarter of this financial year. This is because inflation is expected to come down further, giving the RBI the room to cut rates. Also, the government’s borrowing programme will be clearer by then which could give additional comfort to the central bank,” said Arun Khurana, head of global markets (business operations) at IndusInd Bank.