The Reserve Bank of India ( RBI) is unlikely to tinker with its interest rates, days ahead of the US Federal Reserve policy review and the British referendum on European Union membership, say the 10 economists polled by Business Standard.
While RBI Governor Raghuram Rajan in the past has said other factors, including domestic fundamentals, outweigh the US Federal Reserve policy meets, this time it would be different.
RBI is also scheduled to release its second bi- monthly policy statement for FY17 on June 7. Not only is the US Fed widely expected to raise rates in June, the possibility of a Brexit, or aBritish exit, wouldbe a majorevent for the global financial markets— and India would be impacted as well.
“RBI would not want to move before assessing the outcome of the US Fed meet and Brexit in June,” said Soumya Kanti Ghosh, chief economist, State Bank of India.
The Indian currency, of late, has acted somewhat jittery, losing a full rupee since the last policy review; it can lose further if Fed raises rates and aBrexit happens. A weakening rupee pushes up inflation, already under pressure after crude oil prices crossed $ 50 a barrel. Rupee closedat67.29adollaronThursday.
Wholesale price inflation surprised many, by rising 0.34 per cent in April, compared with minus 0.85 per cent in March. The retail inflation number, tracked by the central bank for policy purposes, stood at 5.39 per cent in April, from 4.83 per cent in March. Even as rainfall is expected to be good this year, inflation would likely firm up further, caution economists. Some even fear inflation couldreachwaybeyondRBI’s mandate of five per cent for the following year. Dhananjay Sinha, head of research at Emkay Global Financial Services, said inflation could top 6.5 per cent, as policies followed by the government and RBI could be inflationary.
RBI, according to its policy mandate, is required to maintain aconsumer price index inflation anchored at around four per cent, with a band of two per cent. Economists say they would examine the policy language carefully to gauge RBI’s take on inflation and global growth, even as the latest gross domestic product ( GDP) growth numbers have given some comfort. The economy grew 7.9 per cent in the fourth quarter and 7.6 per cent for the full year 2015- 16. Still, there could be downside to the growth, if global growth stalls.
“It has to be seen if there is a significant change in policy stance; what’s RBI’s take on GDP growth, and whether this warrants a change in forecast. Changes in global commodity prices and global conditions, though, warrant a pause at this moment,” said Saugata Bhattacharya, chief economist, Axis Bank However, the most important factor that would prevent the central bank from cutting rates further is the pending policy transmission.
“There is no point cutting rates further as banks are yet to pass on the past cuts. The transmission is the most important factor to look out for and it has not yet happened fully. The room for further cuts is getting squeezed. There could be no further rate cut, at least till end- December,” said Rupa Rege- Nitsure, group chief economist, L& T Finance Holdings.
RBI has so far reduced policy rates by 150 basis points (bps), but banks have only managed to pare their lending rates by about half.
In its last monetary policy on April 5, RBI had cut its policy repo rate by 25 bps to 6.5 per cent.
Economists would also be looking out for the central bank’s take on liquidity and more details on how it would tackle FCNR( B) deposit redemptions.
“Guidance could be a little cautious on inflation but more details on how RBI views liquidity at the time of FCNR maturity would be interesting,” said Anubhuti Sahay, chief economist, Standard Chartered.
“The central bank might not announce any additional measures for liquidity. In the last policy, RBI had announced its plans to provide durable liquidity in the banking system,” said Upasna Bhardwaj, economist, Kotak Mahindra Bank, adding, “ The policy could be tilted towards a hawkish stance.”
Business Standard New Delhi, 03 June 2016
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