The hawkish statement on inflation from the Reserve Bank of India (RBI) in its mid-quarter review of monetary policy has dashed the hope of a respite on the rate front anytime soon, as market participants say further monetary easing can be delayed till October or even later.
The central bank, which kept policy rates unchanged in the mid-quarter review announced last Monday, has justified its action on persistence of overall inflation at wholesale and retail levels and sticky inflationary expectation, despite moderation in core inflation.
As the next policy review is merely after a month — RBI will announce its first quarter review on July 31 — experts do not see substantial change in the inflation parameters.
“We do not expect a rate cut in July, given the hawkish stance of the mid-quarter review,” said Samiran Chakrabarty, chief economist and head of research, Standard Chartered Bank.
“The parameters cited for maintaining the status quo, like headline inflation and retail inflation, are not expected to change drastically in a month. So, if RBI continues to benchmark these parameters for its decision-making on the rate front, then there may not be any rate cut in July policy.”
After cutting the policy rate for the first time in three years this April, the central bank held on to rates in the June policy, which disappointed the market.
In response, short-term rates and bond yields rose, reflecting the expectation of continuation of the hawkish stance.
“Unless there is dramatic deterioration in external or domestic risk factors, the central bank would likely remain on the sidelines until inflation eases appreciably. Looking at our WPI (wholesale price index) forecast, we don’t see an easing window until the fourth quarter of this year,” Taimur Baig and Kaushik Das, economists at Deutsche Bank, said in a report. “The next rate cut, in our view, will be in October or later. We see about 50-75 basis points rate cuts over the next 12 months; the risk, however, is that RBI ends up doing even less.”
Bank of Baroda’s chief economist, Rupa Rege Nitsure, also agrees the chance of a rate cut is limited, as inflation will not come down in a month.
“The chance for a rate cut in the July policy is low, as inflation continues to stay at elevated levels. In fact, when RBI slashed rates aggressively last time by 50 bps (in April), two days later the CPI inflation data for March was out, which was 9.55 per cent. As a result, RBI faced a lot of criticism. In addition, even if the pressure on inflation is coming from food prices, via dearness allowance adjustment, inflation will generalised — an argument the central bank is making consistently,” Nitsure said.
She added the delay in the monsoon and rise in minimum support prices for various crops by an average of 21 per cent are all developments adverse for inflation. The only silver lining is that crude oil prices have softened considerably, which will reduce the import bill and the government’s subsidy burden.
“By the end of July, we will have a fair idea of the monsoon. In addition, if crude prices stay where they are now, it will help the government manage the fiscal and current account deficits — the twin deficits the central bank is worried about. The movement of the rupee will be also crucial for further action on the rate front,” said S L Bansal, chairman and managing director, Oriental Bank of Commerce.