RBI to maintain status quo next week: BS POLL

Market participants expect retail inflation, at three-month high of 8.59% in April, to fall below 8% by Jan-March of 2015

At its bi-monthly monetary policy review on June 3, the Reserve Bank of India (RBI) may once again keep the key policy rate unchanged, as the inflation trajectory is likely to be in line with the central bank’s projections. Broadly, market participants expect Consumer Price Index (CPI)-based inflation to gradually fall to at least eight per cent by January-March 2015, as projected by the Urjit Patel committee on monetary policy.

Though RBI is likely to keep the policy rate unchanged, the second consecutive time, the tone will be hawkish; the central bank will focus on the need for fiscal consolidation through a reduction in subsidies provided by the new government.

After a poll of 10 experts by Business Standard, it was found all expected status quo on the policy rate next week. At the central bank’s first bi-monthly monetary policy, too, it hadn’t changed rates. Currently, the repo rate stands at eight per cent, while the reverse repo rate is seven per cent.

“CPI inflation is according to RBI’s trajectory and the outlook for CPI is it will be at or below eight per cent by January-March 2015, which is RBI’s target. Due to this, we expect status quo on key policy rates next week,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.

In April, CPI-based  inflation accelerated to a three-month high of 8.59 per cent, primarily driven by higher food prices, compared with 8.31 per cent in March. In April, RBI had said it was willing to look through any transient increases in retail inflation data.

“Inflation has not gone down, due to which there is no reason for RBI to start cutting rates. However, the expectation is inflation will come down. In that case, why will RBI hike rates? RBI should be maintaining firepower in case inflation starts inching up due to a below-normal monsoon. In that case, an immediate rate rise will not help,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

The India Meteorological Department has projected a below-normal monsoon this year, owing to which RBI’s monetary policy stance might continue to be hawkish. A few experts also believe RBI might wait to see the new government’s steps to manage inflation.

“RBI will continue with its anti-inflationary stance despite maintaining status quo on rates. This is because it will wait for steps from the new government, which will help bring down inflation,” said Dwijendra Srivastava, chief investment officer (debt), Sundaram Mutual Fund.

The Street feels the Bharatiya Janata Party-led National Democratic Alliance is “pro growth”. Experts believe this government might come up with steps to reduce inflation and, therefore, RBI’s inflation management responsibilities might be reduced.