The Reserve Bank of India (RBI) is likely to leave interest rates unchanged in its monetary policy review on Tuesday, preferring to keep its powder dry until the US Federal Reserve raises borrowing costs from near-zero levels, according to bankers and economists.
The central bank may also want to see how the monsoon plays out in August and September before it cuts the repurchase rate, the rate at which it lends money to commercial banks, for a fourth time this year.
RBI, under governor Raghuram Rajan, has cut the policy rate three times by a quarter of a percentage point each, to 7.25%, since the start of the year, seeking to kickstart the stalled investment cycle and bolster economic recovery.
Only one of 13 bankers and economists, whose forecasts for the outcome of Tuesday’s monetary policy review were compiled by Mint, expects a cut—by another quarter of a percentage point.
The Indian central bank may prefer to hold interest rates steady until after the Federal Reserve’s September meeting, when the US central bank is expected to raise its key rate for the first time since 2006, or at least indicate when it would do so, bankers and economists say. The Federal Reserve meets on 16-17 September and RBI’s next monetary policy review is due on 29 September.
Uneven monsoon rainfall and the possibility of it turning deficient in August poses the risk of inflation flaring up in the coming months, said Royal Bank of Scotland economistGaurav Kapur.
“There is still upside risk to RBI’s projection of 6% (consumer price inflation) in January,” Kapur said. “If US Fed indicates rate hikes in September, that will have impact on the domestic flows as well. Overall, the room for further rate cuts is limited and we expect a status quo on Tuesday.”
Inflation as measured by the Consumer Price Index was 5.4% in June, up from 5.01% in May.
Although RBI has cut interest rates by 75 basis points (bps) so far this year, commercial banks have lowered borrowing costs only by 25 bps. That came after governor Rajan criticized the lenders in April for not passing on the benefit of lower rates to their customers.
Any further policy rate cut at this point may not encourage banks to lower their lending rates further. And despite the RBI rate cuts, bond yields haven’t budged much since January; the benchmark 10-year bond yield is at around 7.8% now, compared with 8% in January, indicating the cuts have had little impact on markets. Bond prices and yields move in opposite directions.
Most of the movement in domestic bond yields has been driven by the policy statements of the US Federal Reserve and the prospects of an interest rate increase in the world’s biggest economy, which created huge volatility in international markets and caused bond yields globally to shoot up, including in India.
Bankers and economists say RBI will likely cut the repurchase rate by another 25 bps this calendar year to spur on economic recovery, but that won’t be on Tuesday.
“We do not expect any rate action from RBI in the August policy meeting. However better-than-expected monsoon performance, limited increase in MSP (minimum support price), decline in rural wages and lower Indian crude oil prices by 15% since June 2 are likely to lead to replacement of the phrase ‘upside risks’ to the FY16 inflation trajectory with ‘risks are balanced’,” said Standard Charteredeconomist Anubhuti Sahay in an email.
She expects the central bank to indicate room for further easing provided data flow and the August monsoon rainfall remain favourable.
“Balance of probability is strongly for RBI to hold its policy rates, despite abating of most of the risks to inflation highlighted by early June—poor rains, crude prices and external volatility. Despite an increase in government spending in the first quarter, RBI is likely to cite the legislative stymie and tardiness of structural reforms as reasons,” Saugata Bhattacharya, chief economist at Axis Bank Ltd, said in an emailed response.
State Bank of India’s chief economist Soumya Kanti Ghoshalso said RBI will leave interest rates unchanged, but may drop the phrase “upside risk” to its 6% inflation target for January 2016.
Bank of Baroda’s chief executive and managing directorRanjan Dhawan said RBI is unlikely to cut rates on Tuesday, but the central bank will lower its interest rates as and when it finds the scope to do so.
“Rates (lending and deposit) will come down with a lag, but for the policy on Tuesday, monsoon is a great variable. We expect a pause,” said Dhawan.
IDBI Bank Ltd’s executive director and head of treasury N.S. Venkatesh is the only one to expect a 25 bps rate cut on Tuesday.
“The inflation trajectory is moving faster towards a benign price outlook. Commodity prices, oil and gold, have cooled off substantially. US Fed may again delay its rate hike decisions as the growth is at the nascent stage in the US. Now is the best time to cut rates for RBI,” said Venkatesh.
HT Mint, New Delhi, 4th August 2015
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