While stable currency, fiscal consolidation and improvement in the quality of government expenditure may provide some relief to Governor Raghuram Rajan, deficient monsoon and rise in the prices of essential food items may force RBI to adopt a cautious approach.
In its preview of the upcoming monetary policy review, Yes Bank expects RBI to leave the policy rates unchanged.
Factors that could shape RBIs decision:
* CPI inflation dropped to 7.31% in Jun 2014, and it has now undershot RBIs base case projected level of 7.8-8.0%. A favourable inflation surprise of this magnitude is likely to provide comfort to the central bank.
* As monsoon performance has improved from a peak cumulative deficit of 44% (as of June 12) to a cumulative deficit of 24% (as of July 24), it will impact food prices.
* There has been significant rise in prices of key vegetables like tomatoes (up by 86%), onions (up by 35%), potatoes (up by 12%) in July. There is also pressure on prices of cereals and oil seeds.
* Stable exchange rate, restrained support price increases, ongoing fiscal consolidation may have a disinflationary impact.