The market’s rate cut expectations are premature and are unlikely to be met when the Reserve Bank of India reviews its policy on 31 July, said a research note by Standard Chartered.
“Containing inflation will remain central to the RBI’s hawkish stance, which it is likely to reiterate,” the note said.
Recent comments from RBI Governor D Subbarao have made it clear that containing inflation is the central bank’s top priority.
Earlier this month, Subbarao said inflation is still “way above” its comfort level.
“Certainly high inflation leads to loss of growth, and WPI at 7.25 percent as per the number that came this morning, and CPI inflation in double digits - we are way above that threshold,” Subbarao was quoted as saying in a Reuters report. The RBI's threshold level for inflation is around 5 percent, he had said.
The inflation scenario for the rest of the year is far from optimistic, the note said. “Food inflation stayed sticky (in June), at 10.8 percent year-on-year, and with rainfall 22 percent lower than the long-term average, it is vulnerable to upward pressure,” it said.
Add to this the government’s inaction on fiscal front.
The government is yet to come out with a strong action to bring about fiscal consolidation. There has already been a significant delay in increasing government-regulated diesel and cooking gas prices.
Media reports have suggested the government is buying more time to implement a revision. Earlier, the reports said the government would take a decision on this after the presidential polls. Now, a decision is expected after the vice-presidential polls on 7 August.
“Further delays to fuel-price revisions would make meeting fiscal deficit targets impossible. Given that the RBI cut rates at its April meeting in anticipation of progress on fiscal consolidation, and that such progress has not materialised, justification for a rate cut is weakened,” the note said.
The RBI will keep its hawkish stance on inflation intact and reduce expectations of a rate cut even at the September meeting, unless global conditions deteriorate significantly or domestic policies surprise positively, it said.