RBI to press pause button on Tuesday: BS Poll

While Raghuram Rajan has said in the past that other factors, including domestic fundamentals, outweigh the US Fed policy meet, this time it would be different

The Reserve Bank of India (RBI) is unlikely to tinker with its interest rates just a few days ahead of the US Federal Reserve policy review and the British referendum on EU membership, say all 10 economists polled by Business Standard.

While the RBI governor Raghuram Rajan in the past has said that other factors, including domestic fundamentals outweigh the US Federal Reserve policy meet, this time it would be different. Not only the US Fed is widely expected to raise rates in June, the possibility of a 'Brexit', or a British Exit, would be a major event for the global financial markets and India would be impacted too.

"RBI would not want to move before assessing the outcome of the US Fed meet and Brexit in June," said Soumya Kanti Ghosh, chief economist at State Bank of India.

The rupee of late has acted a bit jittery, losing a full rupee since the last monetary policy review but it can lose even more if Fed raises rates and also Brexit takes place. A weakening rupee will push up inflation, which has been under pressure after crude oil prices crossed $50 a barrel. Rupee closed at 67.29 a dollar on Thursday.

Wholesale price inflation (WPI) surprised many by rising 0.34% in April, compared with -0.85% in March. The retail inflation number, which is tracked by the central bank for policy purposes, stood at 5.39% in April from 4.83% in March. Even as rainfall is expected to be good this year, inflation will likely firm up further, economists fear. Some even fear that inflation could reach way beyond RBI's mandate of 5% for the next year.

Dhananjay Sinha, head of research of Emkay Global Financial Services said inflation could top 6.5% as policies followed by the government and RBI could be inflationary. RBI, as per its policy mandate is required to maintain CPI inflation anchored at around 4% with a band of 2%.

Economists say they would examine the policy language carefully to gauge the RBI's take on inflation and global growth even as the latest GDP growth numbers have given some comfort. The economy grew at 7.9% in the fourth quarter and 7.6% for the full year 2015-16.

Still, there could be downside to growth if global growth stalls. "It has to be seen if there is a significant change in policy stance, what's RBI's take on GDP growth, and whether this warrants a change in forecast. Changes in global commodity prices and global conditions though warrant a pause at this moment," said Saugata Bhattacharya, chief economist at Axis Bank.

However, the most important factor that would prevent the central bank from cutting rates further is the pending policy transmission.

"There is no point cutting rates further as banks are yet to pass on the past cuts. The transmission is the most important factor to look out for and it has not yet happened fully. Room for further cuts is getting squeezed and there could be no further rate cut at least till the end of December," said Rupa Rege Nitsure, Group Chief Economist with L&T Finance Holdings.

RBI has so far reduced policy rates by 150 basis points, but banks have only managed to pare their lending rates by just about half of it.

Economists would also be looking out for the central bank's take on liquidity and more details on how it would tackle FCNR(B) deposit redemptions.

"Guidance could be a little cautious on inflation but more details on how RBI views the liquidity situation at the time of FCNR maturity would be interesting," said Anubhuti Sahay, chief economist at Standard Chartered Bank.

But the central bank might not announce any additional measures about liquidity as in the last policy itself the RBI had announced its plans to provide durable liquidity to the banking system, said Upasna Bharadwaj, economist at Kotak Mahindra Bank.

"The policy could tilt towards a hawkish tone even as stance would remain accommodative," said Bharadwaj.

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