No scope for rate cut on Tuesday

With the government adopting inflation target of 4 per cent, the Reserve Bank of India (RBI) is likely to keep its policy rates unchanged on Tuesday in the third bi-monthly monetary policy review.

Since January 2015, RBI has reduced its policy rates by 150 basis points to 6.50 per cent. But with the adoption of the inflation target of 4 per cent, the chances for further rate cut in the remaining part of the financial year seem slim, economists had warned in a Business Standard poll on Thursday.

As per the Reserve Bank of India’s projection, the consumer price index (CPI) should follow a glide path to come down at 5 per cent by January 2017. The retail inflation should fall even further to anchor itself at 4 per cent by March 2018 and thereby inflation should be within a range of 4 per cent (plus or minus 2 per cent) till the target is adjusted again after five years.

However, if the recent CPI prints are any indication, RBI’s January projection is in threat and some economists also fear that the central bank may narrowly miss it. The May and June CPI numbers of 5.8 per cent were on the higher side and July and September will also be unfavourable due to the base effect.

Additionally, the price rise in services sector after the goods and services tax (GST) gets implemented and the pay hike of central government employees will make inflation control a tough job for the central bank. On top of that, global commodity prices have started firming up and this doesn’t augur well for inflation management.

Most of the 10 economists polled by Business Standard on RBI policy said the central bank’s take on inflation, and whether it would be able to meet the target, would make for most interesting read in the policy documents. All the 10 economists said they expected RBI to maintain status quo. “There is almost no scope for cutting rates in this policy as long as the inflation target is 4 per cent,” said Saugata Bhattacharya, chief economist at Axis Bank, in the BS poll.