RBI Likely to Maintain Status Quo on Interest Rates

Raghuram Rajan has reduced the benchmark interest rate by 1.5 percent since January last year.

India’s Finance Minister Arun Jaitley (L) listens to Reserve Bank of India (RBI) Governor Raghuram Rajan during a financial stability development council meeting in Mumbai, 7 June 2014. (Photo: Reuters)

With inflation rearing its head again and global crude oil prices inching up, the Reserve Bank is likely to maintain the status quo on interest rates tomorrow at its bi-monthly monetary policy review for the current fiscal, say experts.

Besides, the central bank may wait for the impact of delayed monsoon rains before making the next move. RBI Governor Raghuram Rajan, criticised for following hawkish monetary policy for too long before starting to lower rates, has reduced the benchmark interest rate by 1.5 percent since January last year. Since then, he has been persuading banks to fully transmit the benefit of the policy rate cut to customers.

The customary post-policy press briefing by Rajan, whose current 3-year term as the central bank Governor ends in September, will also be closely watched for any cues relating to whether he is being given an extension.

I don’t see much in this credit policy. Interest rate wise, there would not be any change.

Kishor Kharat, Managing Director, IDBI Bank

Tuesday’s review could also turn out be the last policy anchored by Rajan if the proposed Monetary Policy Committee (MPC) is put in place before the next review due on 9 August.

Economic Affairs Secretary Shaktikanta Das had said the panel would be vested with powers to decide on interest rates from September onwards.

The six-member MPC will include RBI Governor and three nominees of the government, which has a mandate to bring consumer or CPI inflation to the pre-set target.

RBI is likely to maintain status quo this time. Although there is consistency in inflation numbers, the last numbers do not give much comfort. Only positive factor is good monsoon. RBI will wait for it to happen before taking any call on rate cuts.

Senior Banker 

Arun Jaitley and Raghuram Rajan. (Photo: Reuters)

Retail inflation soared to 5.39 percent in April on higher food prices, reversing a downward trend seen in recent months.

With inflation remaining sticky at slightly above 5 percent and growth fairly steady (although uneven), we expect policy rates to stay on hold until end-2016 (including at the upcoming policy meeting on 7 June) with the focus shifting to liquidity provision.

Nomura in a report

After a gap of six months, RBI had cut repo rate, at which it lends to other banks, by 0.25 percent to 6.5 percent in April. It was the first bi-monthly monetary policy review of the current financial year 2016-17.

Besides rising inflation, the crude oil price is also looking up and has touched $50 a barrel, from a low of about $30, and could increase inflationary pressures.

Personally, I don’t expect the Governor to cut the rates on Tuesday given the delay in the monsoons.

Zarin Daruwala, CEO, StanChart India

According to Morgan Stanley, the Reserve Bank of India is expected to wait for the onset of monsoon to see the trend in actual inflation before proceeding for the rate cut.

However, some experts feel that there is a strong case of rate cut in the upcoming policy.

There is a compelling reason for RBI to cut interest rate as inflation is low, monsoon projection is favourable and there is a need to push growth. My sense is that the central bank would cut rate by 0.25 percent this time and by similar percentage point in August before the busy credit season starts.

Rana Kapoor, Managing Director, Yes Bank