RBI's policy guidance on April 1 may be limited to next review

Last Updated: Mon, Mar 17, 2014 06:57 hrs

In the first bi-monthly monetary policy statement, 2014-15 to be announced on April 1, the Reserve Bank of India (RBI) may give guidance on interest rates till the next policy review because beyond that it depends up the outlook of the monsoon and the elections. The monsoon will have a direct impact on food prices while after the elections a new government will be formed and they may announce an expansionary budget which could put pressure on inflation.

Voting for the 2014 general election will begin in April and the budget is expected to be presented in June. By June the outlook for the monsoon will also be very clear. The bi-monthly monetary policy is as per the recommendations made in the Urjit Patel committee report to revise and strengthen the monetary policy framework.

RBI's focus is now more on Consume Price Index (CPI) linked inflation as recommended even in the committee report. CPI inflation eased more than expected to a 25-month low in February. The CPI inflation rose 8.1% from a year earlier, compared with 8.79% in January.

“The guidance will be given only for the next policy review and that will depend upon the trajectory of CPI inflation. Besides that there are two important events which are the outlook of the monsoon and impact on food inflation. And secondly the election which will see the formation of a new government,” said Shubhada Rao, chief economist, YES Bank.

A Prasanna, chief economist, ICICI Securities Primary Dealership concurred, “The guidance will be this that if CPI inflation moves as per the trajectory, the rates will stay here. I do not think RBI will be able to give a guidance too much into the future.”

RBI hiked the repo rate by a quarter percentage point to 8% in January. RBI had cited a “glide path” towards lowering the CPI inflation below 8 percent by next January and 6 percent a year later. The Urjit Patel committee recommended in January that in the view of the elevated level of current CPI inflation and hardened inflation expectations, supply constraints and weak output performance, the transition path to the target zone should be graduated to bringing down inflation to 8% over a period not exceeding the next 12 months and 6% over a period not exceeding the next 24 month period before formally adopting the recommended target of 4% inflation with a band of +/- 2%.

“The inflation trajectory remains on track to soften to 8% by January 2015. However, core inflation has remained sticky implying that chances of demand-led inflationary pressures are still high. Our output gap estimate hints that even with the anticipated marginal growth pick-up, inflationary pressures can be significant. RBI will likely be mindful of this and hence we expect RBI to maintain a status quo on rates at its next policy meeting on April 1, with the communication remaining balanced. Our base-case scenario remains an extended pause for most of calendar year 2014,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

In the January policy review RBI said it expected a modest recovery in economic growth in 2014-15 but cautioned that inflation risks may continue despite some moderation in prices in recent weeks. "On current reckoning, growth in 2013-14 is likely to fall somewhat short of the Reserve Bank's earlier projection of 5%. However, a moderate paced recovery is likely to shape in the next year with support from rural demand, a pick-up in exports and some turnaround in investment demand. The growth in 2014-15 is likely to be in the range of 5-6%," said RBI.

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