Inflation set to halt Rajan’s rate-cut train

  • Beena Parmar
  • Updated: Jun 06, 2016 12:18 IST

MUMBAI: Raghuram Rajan, the Reserve Bank of India governor, hasn’t obliged corporate India or the average Indian with too many rate cuts since he assumed office in September 2013, yet most people are backing him for a second three-year term. So all eyes will be on him as he presents the bi-monthly policy review on Tuesday.

Will Rajan cut interest rates? He may opt for status quo, given that retail inflation has been showing signs of rising, and wait for the impact of the monsoon, which, though delayed, is expected to be good this year after two bad ones. Rajan would also be alert to the renewed possibility of a rate hike in the US, which will affect the Indian rupee once the American dollar rises.

Brexit, or a British exit from the European Union, which will be decided by a June 23 referendum, is another event to watch out for. It will jolt the global financial markets. India, with its close monetary linkages with Europe, will not be spared.

The repo rate — the rate at which banks borrow from the RBI — currently stands at 6.50%.

“I am not expecting any change in this policy till December 2016. The RBI will remain in the cautious mode as it awaits more data with regards to geopolitical development, oil prices, the quantum of rains, impact of 7th Pay Commission and the consumption stimulus,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.

“Our forecast of mild-growth acceleration and improved monetary policy transmission should boost growth, reducing the need for a rate cut,” said Deepali Bhargava of Credit Suisse.

The RBI has so far reduced policy rates by 150 basis points to 6.5% since January 2015, but banks have only managed to transmit just half of it to borrowers.

In the last monetary policy review in April, Rajan stressed that the transmission of past and present rate cuts was important at this juncture.

Moreover, with the economy growing at comforting levels of 7.9% in the fourth quarter and 7.6% for the entire fiscal (2015-16), a rate cut may not be warranted.

“The RBI would not want to cut rates before assessing the outcome of the US Fed meet and Brexit in June,” said Soumya Kanti Ghosh, chief economic adviser, SBI.

Even as rainfall is expected to be good this year, inflation will be a factor to watch out for. Retail inflation, which the RBI tracks for policy purposes, stood at 5.39% in April, against 4.83% in March.

The rupee, which has weakened from 66.25 to 67.25 against the US dollar since the last policy review in April, can lose even more if Fed raises rates and Brexit actually happens. A weak rupee will push up inflation, which has been under pressure after crude oil prices crossed $50 a barrel.

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