HBSC sees RBI holding onto high rates till monsoon

Even though the inflation ebbed to 5.52 per cent in October, foreign brokerage HSBC today said the Reserve Bank will adopt a cautious stance on rates and a reduction is possible only after the monsoon next year.
It said a rate cut may result in the quality of growth suffering and also heighten the chance of RBI missing its inflation targets.
"The RBI will, therefore, remain cautious about changing its policy stance pre-maturely. At the least, expect a pause till the rains set in next year," it said in a report released before the October inflation data was announced.
In September, retail inflation stood at 6.47 per cent.

The consumer price inflation, which has been the key factor governing RBI's rate stance, came in at 5.52 per cent in October, increasing hopes among many quarters of a rate cut to boost economic growth.
After two fiscals of sub-5 per cent growth, the country notched up a 5.7 per cent GDP expansion in the June quarter, which is expected to fall to 5 per cent level due to a slowdown in industrial production.

The RBI wants to get the inflation to 8 per cent by January 2015 and down to 6 per cent by January 2016.
It can be noted that at the last policy announcement, RBI Governor Raghuram Rajan said the inflation will trend lower till the end of the year on a base effect. He has been consistently saying the RBI wants to fight the battle against inflation decisively and ensure the high price rise problem does not arise repeatedly.

Hinting at the upcoming changes in the monetary policy setting system, HSBC said the present rate cut cycle, whenever it starts, will be unique because from now on the RBI may have an explicit inflation target and added that this will put pressure on the RBI.
"Ideally, the nominal policy rate should decline gradually (up to 200bps even) if Prime Minister Modi's reforms boost productivity in the economy. If this does not happen, the rate cut cycle will be relatively shallow given low tolerance for inflation now," it added.