Skip Sept date with rates

US Federal Reserve holds rates. Domestic financial markets read this as a great opportunity for the RBI to cut repo rate by 25 basis points on September 29 on the back of low inflation. Equities surged while 10-year g-sec yields traded below 7.70 per cent intra-day.

Will RBI move? With the six per cent target for headline CPI by January 2016 mostly in sight, this does open up some room for the RBI to cut. However, in my opinion, RBI will stay on a pause. In August, the RBI had argued that significant uncertainty can be resolved in months ahead. However, uncertainties appear to have risen rather than having declined.

Monsoon deficit increased to 15 per cent from six per cent from the last policy statement in early August. Prices of pulses and oilseeds have stayed firm, and according to the RBI, these tend to be sticky and impart an upward bias to inflation and inflation expectations. No doubt, inflation expectations had hardened according to the last survey. Vegetables prices have stayed firm too. And, reservoir storage levels have started to slip off, currently about 77 per cent of the 10-year average, bringing into focus the risks to the rabi crops. Finally, it is also now evident that this dry spell can well continue into 2016 season.

Other uncertainties such as the US Fed action remain unresolved. Anyway, global flows are drying up and the implications of a Fed rate increase for the EM financial markets are not clear. The added complexity comes from China's action to devalue its currency. The Chinese economy is looking shaky and unpredictable at this point with the People's Bank of China hoping it would be able to hold the economy at its lower end of the growth trajectory of seven per cent. If it fails, a further round of Yuan depreciation pressure could be seen, having its implications for other EM currencies, including India's.

It is hard to imagine if the RBI could turn a blind eye to these uncertainties.Faced with such a scenario, the best thing for the RBI to do is to stay put. Anyway, a 25 bps will not be able to do much for growth, given there is still space for the previous rate cuts to be passed on. Only after the above uncertainties are taken care of, will the RBI think of incrementally easing the repo rate.

The author is chief economist at IDFC. Views are personal.