The Reserve Bank of India (RBI) is expected to hold its policy interest rate steady at its quarterly review tomorrow, maintaining its pressure on the government to reduce a ballooning fiscal deficit and take steps to remove bottlenecks that are driving up food prices.
Although bankers expect RBI to cut the Cash Reserve Ratio (CRR) by up to 0.50 percent, it would not be possible for the central bank to heed to India Inc’s call for a rate cut, as inflation at over 7 percent is much above its comfort level.
Complicating the picture further is weaker-than-average monsoon rains, which are pushing up food prices and adding to inflation.
Moreover, the RBI comment that there is no trade off between growth and inflation in the medium term clearly signals the centrality of inflation in the Central Bank’s policy stance.
“Given that the government has not taken any concrete steps to address the supply side issues, or the fiscal pressures, the central bank is unlikely to ease rates at this moment,” Shubhada Rao, chief economist at Yes Bank told Reuters.
In an interview to CNBC-TV18, Taimur Baig, chief economist, India, global markets research, Deutsche Bank said while he doesn’t expect any rate action tomorrow, RBI’s commentary on the guidance for the quarter and the year ahead will be important.
Even ICICI Bank research doesn’t think RBI will follow its emerging market counterparts in cutting interest rates given an assessment of inflation trajectory. “Meanwhile, the Central Bank is likely to revise down the FY2013 growth projection from 7.3 percent YoY,” it said today.
But some economists and brokerages still expect the RBI to cut rates to support sagging growth.
In the forthcoming quarterly monetary policy review, RBI should reduce repo rate by 25bps as the demand-led (or core) inflation has already eased substantially, the economic slowdown is deepening as shown by GDP data, IIP numbers, rising NPA cycle etc, and the global economic downturn is spreading, suggesting lower commodity prices and downside risks to India’s growth, said Edelweiss Research in a note today.
But given that RBI has shifted its focus from core to headline inflation of late (where upside risk exists due to poor monsoon), there is a likelihood that the central bank may resist further easing this time, Edelweiss added.
According to Raamdeo Agrawal, Joint MD , Motilal Oswal Financial Services, RBI may respond by releasing more liquidity by CRR or 0.25 percent cut, but expectations are very low. Agrawal said it is difficult to predict RBI’s move this team because the global markets too are challenging. Oil is above $107, there is no policy action from the government and the investment pipeline too is weak.
“We expect a 50 basis point reduction in CRR to ease money supply. Also a CRR cut will have a cooling effect on the interest rates for customers apart from better effect on monetary transmission than a repo cut,” State Bank of India Chairman Pratip Chaudhuri said.