RBI policy review Tuesday likely to hold rates

The Reserve Bank of India (RBI) is likely to keep rates unchanged when it reviews its monetary policy Tuesday as part of its bi-monthly exercise.

Known for the primacy he accords to controlling inflation, RBI Governor Raghuram Rajan is expected to have food inflation remaining over 8 percent mark weighing heavily on his mind.

The RBI is expected to keep its repo rate (at which it lends money to commercial banks) unchanged at 8 percent.

In the last policy review in June, the RBI retained the policy rate, making it the second consecutive time that Governor Raghuram Rajan kept interest rates unchanged.

The cash reserve ratio (CRR) was also kept unchanged at 4 percent.

The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must keep with the RBI, was cut by 0.5 percent to 22.5 percent of their net demand and time liabilities (NDTL) with effect from June 14.

Rajan raised interest rates three times since he took office in September 2013, even as economic growth slowed to decade-low rates.

He has set a target of bringing down consumer price inflation to 8 percent by the end of the fiscal, and to 6 percent by the next fiscal.

Bank of America-Merill Lynch said it expects the rate cut to happen only in December, if the monsoon normalizes to cool down inflation, or in early 2015 in case the price rise prolongs.

"In our view, the RBI will be on long hold till it is clear that inflation is truly coming off. We think that the expectation of a surprise rate cut on Tuesday, that is gaining currency in some quarters, is unlikely to be met," it said.

"We have penciled our first cut for December, if rains normalize, and in early 2015, in case of drought," it added.

"We expect the RBI to leave repo rate unchanged at 8 percent in its upcoming policy review. While near term risks have imparted uncertainty to the inflation outlook, we believe that RBI's first milestone of 8 percent CPI inflation target for January 2015 is not at risk," Yes Bank said in a report.