Is Raghuram Rajan Turning Hawkish?

The Reserve Bank of India has left interest rates unchanged at a five-year low of 6.5 percent, and promised to maintain an accommodative stance. But the RBI governor Raghuram Rajan also flagged off multiple upside risks to inflation. Now while most economists and market participants still expect another 25 basis point rate cut in 2016, most are not betting on a move in August.

Nomura

Nomura, the Japanese financial holding company, believes that the RBI policy was on the “hawkish side.” Nomura’s strategists told Bloomberg News that the central bank may remain on hold in the foreseeable future.

Given that they have cited various uncertainties on inflation, it should put question-mark on the expectations of further rate cuts that some are expecting.

Vivek Rajpal, Senior Rate Strategist, Nomura

India Ratings

The RBI had warned that the inflation surprise in April made the future trajectory “somewhat uncertain.” India Ratings believes that the uncertainty over inflation will play a crucial role in when the RBI decides to cut rates next.

Rate cut depends on how domestic and global situation evolves from now and on credit growth.

Devendra Kumar Pant, India Ratings

CARE Rating

The RBI has retained the inflation target for the current fiscal at 5 percent, but with an upward bias.

Madan Sabnavis of CARE Ratings believes there would be no rate cut if the headline inflation remains above the target. Considering the recent trend in inflation, Sabnavis expects a rate cut only in the October or the December policy.

Kotak

Kotak Securities warns that RBI’s accommodative stance is nearing an end. They however are still pricing in one 25 basis point rate cut, either in August or in October.

Timing of the rate cut would depend on host of factors such as, the implementation of 7th Pay Commission, monsoon distribution and global factors. We expect consumer price index to show upward trajectory with a fading base effect and we believe these factors will be seen as transient in nature. However, hardening of commodity prices could make the increase more generalised and nudge RBI towards neutral policy stance from the current accommodative stance.

Dipen Shah, Senior Vice President, Kotak Securities

Citi

Not everyone is pessimistic about the prospects of a rate cut in the coming months. Citi expects a 25 basis point rate cut, as the downside risks to inflation outweigh the upside risks, given Meteorological Department’s prediction of an above average monsoon.

HSBC

HSBC too believes that rains hold the key to future rate cuts from the RBI. They are pricing in a 25 basis point rate cut in August, if there’s sufficient rainfall in June and July.

We find that food prices are clearly sensitive to reservoir levels. Reservoir levels, in turn, depend on carry forward stock of water and current rains. This time around, the carry forward stock is in deficit and hence early rains over June and July are even more important. 

Pranjul Bhandari, Chief India Economist, HSBC