Prudent to hold repo rate as upside risks to inflation exist: Dun & Bradstreet

It expects the WPI inflation to be in the range of (-) 2.8% to (-) 2.6% during May 2015

The Reserve Bank should keep the interest rates steady in the near term keeping in view the upward risks to inflation such as estimated lower foodgrain production, possibility of below-normal monsoon and rise in fuel prices, says a Dun & Bradstreet report.

"It might be prudent to hold the policy rate steady for the time being as upside risks to food inflation still persists," Dun & Bradstreet India Senior Economist Arun Singh said.

According to the research firm, though inflation levels are expected to stay in the negative, estimated comparative lower food grain production for FY15, probability of an El Nino weather condition and slow but steady increase in fuel prices pose an upward risk in the near term.

D&B expects the WPI inflation to be in the range of (-) 2.8 per cent to (-) 2.6 per cent during May 2015.

Deflationary pressure continued for the sixth month in a row with inflation dropping to a new low of (-)2.65 per cent in April, mainly on account of decline in prices of fuel and manufactured items even as food prices increased.

However, the repo rate should be cut by another 25 to 50 basis points after July 2015 when the impact of the monsoon can be better ascertained and before the US Federal Reserve starts hiking the interest rate, he added.

The central bank has lowered its policy rate twice so far in 2015, but maintained a status quo in its last monetary policy review on April 7 on fears of unseasonal rains impacting food prices.

Singh further noted that, sharp fall in rupee, FIIs outflow, declining exports, rise in stressed asset ratio in banking system, disappointing corporate earnings given weak pricing power as demand still fails to pick up momentum, underscore concerns of the pace of recovery of the economy.

The next review meeting is scheduled on June 2, although the previous two cuts have taken place outside the scheduled policy reviews.