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RBI likely to hold rate next month

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Monsoon uncertainty, increase in oil prices cloud inflation outlook
The Reserve Bank of India ( RBI) is expected to keep the interest rate unchanged on August 24, in its third bi- monthly monetary policy review for 2015- 16.
This was the near- unanimous response of 10 market participants in a poll conducted by Business
Standard. While nine of the respondents said they expected RBI to maintain the repo rate — the rate at which banks borrow from the central bank — at 7.25 per cent, only one said the rate could be reduced, by 25 basis points.
The market believes the outlook for inflation over the next few months depends on the monsoon rainfall during the rest of the season.
So, RBI Governor Raghuram Rajan might adopt a wait- andwatch approach for now. Besides, RBI had front- loaded the rate cut, with a 75- basis- point reduction since the start of 2015.
“Food prices remain at the mercy of exogenous events like rains.
As such, they also remain the biggest threat for RBI in its desire to lower inflation to four per cent by early- 2018,” said Pranjul Bhandari, chief India economist, HSBC Securities and Capital Markets ( India), in a note to clients.
India Meteorological Department (IMD) data show the monsoon this year ( June 1 to July 15) has so far been six per cent below normal across the country, despite good rains in June. And, there are areas that have so far got 20- 40 per cent less rainfall than normal. In these areas, if there is no strong pick- up, there are high chances of adrought.
Consumer Price Index ( CPI)based inflation rose to a ninemonth high of 5.4 per cent in June, mainly due to an increased rate of price rise in food items. RBI has set an inflation target of less than six per cent by January 2016 and four per cent (+/- 2 per cent) by the end of the two years starting 2016- 17.
Business Standard, New Delhi, 20th July 2015

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