RBI may maintain status quo in June 3 policy review

Reasons being inflation is still high and there is threat of monsoon being weak this time

The Reserve Bank of India may leave the key interest rate unchanged in its June 3 monetary policy review as Governor Raghuram Rajan is likely to prefer containing stubborn inflation before conceding to demands for a rate cut to boost growth.

Rajan had kept the policy rate unchanged at 8% at its April 1 review as inflation, especially of food items, hovered at over 8%. Food inflation in April stood at 9.66% and retail inflation was at 8.59%.

The bi-monthly policy review on June 3 will be the first after Prime Minister Narendra Modi assumed office on May 26.

"RBI is likely to maintain status quo as inflation is still high and there is threat of monsoon being weak this time looming large," Indian Overseas Bank Chairman and Managing Director M Narendra told PTI.

An emerging risk on the inflation front is the likelihood of a deficient monsoon, which could lead to a surge in food inflation and affect growth adversely.

The India Meteorological Department (IMD) has indicated a 60% probability of El Nino this year along with a below-normal monsoon.

The RBI has increased the key repo rate three times since Rajan took over as Governor in September.

According to DBS, "The RBI reiterated that inflation control was a priority and the bank will also attempt to balance growth-inflation objectives. We look for the repo to be left unchanged next week (June 3)."

After meeting new Finance Minister Arun Jaitley last week, Rajan said fighting price increases is a priority and the central bank has always maintained a balance between the need to check inflation and prop up growth.

India's economic growth stayed below 5% for the second year in a row at 4.7% in 2013-14. Growth remained subdued at 4.6% in the fourth quarter.

Foreign lender RBS said while keeping rates unchanged in the policy review, the RBI could gradually ease liquidity conditions in the inter-bank market, which in turn could allow for lower cost of borrowings.

However, industry bodies are clamouring for a rate cut to boost growth.

Assocham said the low level of wholesale inflation of items such as wheat, pulses, vegetables and oilseeds would give extra room to the RBI to be accommodative.

"Governor's job would become much easier as he along with others can see much higher level of commitment to reduce the inflation, both at the WPI and retail level," Assocham president and Yes Bank Managing Director Rana Kapoor said.

Wholesale inflation of food products under manufactured items is under 2%, while items such as sugar, edible oils and cement and lime have shown a negative trend, it said.