Repo rate cut may not happen even in Jan

Economists point to WPI inflation trend, many think RBI unlikely to move on this before March

The chances of a cut in the repo rate continues to be dim in a situation where inflation is expected to remain high.

Many economists do not expect a repo rate (the rate at which the central bank lends to banks) cut by the Reserve Bank of India (RBI) in the mid-quarter review of monetary policy scheduled on December 18 or even in the third-quarter review on January 29. Of nine economists Business Standard spoke to, only three felt sure about a repo rate cut on January 29.

“Wholesale price index (WPI) inflation will be higher than what RBI is projecting and even in the interim, it would be more than RBI’s projections. That might not give RBI the confidence to cut the repo rate in January,” said A Prasanna, chief economist, ICICI Securities Primary Dealership.

 

RBI believes WPI could breach eight per cent but not well above this; however, Prasanna feels before WPI peaks in December-January, it could be above 8.5 per cent.

“Probably by March, RBI will get the comfort to cut the repo rate 25 basis points (bps),” he said. In on Tuesday’s second quarter review of monetary policy, RBI raised the baseline projection for headline WPI inflation to 7.5 per cent from the seven per cent indicated in July.

“Persistent supply constraints may aggravate as demand revives, resulting in price pressures. Global financial instability could put downward pressure on the rupee and that will add to imported inflation. Also, the upsurge in both rural and urban wages will exert cost-push pressures on inflation. Finally, as under-pricing in several products is corrected as part of the fiscal consolidation process, suppressed inflation is being brought into the open. This correction is necessary and important. Nevertheless, it will result in higher inflation readings,” said RBI Governor D Subbarao.

In the January 2013 review, RBI will have the WPI’s December reading. According to Shubhada Rao, chief economist, YES Bank, the December inflation will be higher, essentially due to the unfavourable base effect.

“It may be the peak but considering it will be in the range of 8.25-8.5 per cent, I see lesser probability of a repo rate cut,” she said.

Economists also note the risks that could push inflation upwards. “In the next few months, we will see the full impact of the fuel price hike in inflation. Beyond that, it could be uncertainty in global commodity prices. The pressure on food prices will continue but that will be less than expected earlier,” said D K Joshi, senior director and chief economist at CRISIL.

In the mid-quarter review on December 18, RBI might cut banks’ cash reserve ratio (CRR) further.

“We expect RBI to cut CRR 25 bps again on December 18, to improve bank liquidity and to pull down lending rates,” said Indranil Sengupta, India economist, Bank of America-Merrill Lynch, in a report on Tuesday.

CRR is the proportion of total deposits a bank has to keep with RBI as cash. On Tuesday, this was cut by 25 bps.

After the cut, the CRR is 4.25 per cent of net demand and time liabilities, effective the fortnight beginning November 3.