Status quo seen in Indian central bank's first bi-monthly review

The stage is set for the first bi-monthly monetary policy review of the Reserve Bank of India (RBI) Tuesday and the expectation in the financial world is for interest rates to be left untouched -- that is, no change in your EMIs towards housing, auto or consumer goods loans.

Analysts said RBI Governor Raghuram Rajan would prefer maintaining a status quo on key rates considering the macro-economic data and the uncertainty over the new government's policy after the general elections.

"We are not expecting any change in rates. The RBI should maintain a status quo, given the inflation level and growth data and election," Arun Singh, a senior economist at Dun & Bradstreet, told IANS.

Singh said the recent easing of prices does not offer sufficient room for rate cuts as upside risk to inflation continues, but any increase will dampen growth recovery.

On the back of softening in food and fuel price rise, wholesale price-based inflation eased to 4.68 percent in February, while retail inflation declined to a 25-month low of 8.10 percent.

The central bank has maintained a tight monetary policy during most part of the second term of the Prime Minister Manmohan Singh government, to reign in inflation that remain much above the comfort level of under 5 percent.

Retail inflation has mostly been in double digit, while average wholesale price-based inflation stood at around 7.5 percent in the last five years.

"Already the repo rate (the short-term lending rate) is at 8 percent. If we increase the rates further in the current environment, it could impact businesses in a certain way," said Shashwat Sharma, partner for management consulting with KPMG India.

"RBI may not think of reducing the rates at the moment as they may foresee other factors such as upcoming elections, exchange rate and weather, which could all have an impact on future inflation," Sharma told IANS.

On the recommendations of a panel headed by RBI Deputy Governor Urjit Patel, the central bank has now decided to shift to a system of announcing policy statements once every two months, instead of 45 days that was in practice for the past few years.

Interestingly, RBI used to have only two monetary policy until mid-90s. Bimal Jalan, who became governor in 1997, started the practice of quarterly reviews and his successor Y. V. Reddy introduced the mid-quarter reviews.

The first policy review under the bi-monthly system will be announced April 1. The next review should come at the end of May or early June, by that time a new government should be in place as the election process will be completed in mid-May.

In its previous policy review announced Jan 28, the central had unexpectedly hiked key policy interest rates by 0.25 percent to tame inflation.

The State Bank of India (SBI) said in a research note that the RBI may also surprise the market with a tinketing of less than 25 basis points in key rates. "There also is a possibility of a hike of smaller magnitude than 0.25 percent. That in itself will be a surprise," an SBI analyst said in the note.

According to HSBC, the central bank would stick to its January policy review guidance, in which it had signalled a pause.

"Further policy tightening in the near term is not anticipated," RBI Governor Rajan he had said, but on the condition that disinflationary process evolves as per the baseline projections.

"In fact, if inflation eases at a pace that is faster than we currently anticipate, and that reduction is expected to be sustained, the Reserve Bank will have room to become more accommodative."

(Gyanendra Kumar Keshri can be reached at gyanendra.k@ians.in)