Despite Arun Jaitley's call, analysts see Raghuram Rajan holding rates on Dec 2

Written by PTI | Mumbai | Updated: Oct 29 2014, 01:14am hrs
Arun JaitleyArun Jaitley had hinted that time was ripe for rate cut with inflation trending down.
Foreign brokerages today said Reserve Bank Governor Raghuram Rajan is unlikely to yield to Finance Minister Arun Jaitley's call for a rate cut at the December 2 policy review.

"Pressure is mounting on the Reserve Bank to cut rates at its December meeting...Jaitley's recent call to lower rates to encourage construction activity has revived expectations for rate cuts but it is unlikely to be swayed by the base effects-driven softening in inflation," Singaporean brokerage DBS said in a note.

Analysts are expecting inflation to fall further in October and November on base effect. Inflation measured by consumer prices has been trending down for over four months, and came in at 6.7 per cent in September. The RBI has set a January 2015 CPI target of 8 per cent and 6 per cent for January 2016.

Its French peer BNP Paribas also said the RBI may not deliver a rate cut in its next meeting.

"Rate-cut speculation remains premature in our opinion, given the still uncomfortably high household inflation expectations, which need to be re-anchored to lock in lower inflation," it said in a note.

In an interview over the weekend, Jaitley had hinted that time was ripe for rate cut with inflation trending down.

"Currently, interest rates are a disincentive. Now that inflation seems to be stabilising somewhat, the time seems to have come to moderate the interest rates," he had said in a media interview.

According to some analysts, the lower GDP growth in the September quarter (some expect to slip below 5 per cent), may put more pressure on the RBI to deliver a rate cut.

"Against this backdrop of weak growth and falling inflation, the Reserve Bank is likely to face mounting pressure to ease rates at the December 2 meeting. That said, the RBI will look past these base-effect swings to focus on anchoring inflationary expectations and ensuring medium-term stability," the DBS note said.

Opinion seems to be building up increasingly that Rajan may not do a rate cut at the December review. Yesterday, Bank of America Merrill Lynch also said there may not be a cut in December.

But BofA-ML had said it saw the RBI cutting rates in February, once the 2015 inflation target of 8 per cent was achieved and the January 2016 target of 6 per cent looked achievable.

"We expect the Governor to sound more dovish in December and cut in February. After all, we see CPI inflation well set to meet the RBI's 8 per cent in January 2015 and 6 per cent in January 2016 (with normal rains) targets," BofA-ML said in a note.

DBS said that other factors like the new monetary policy framework will also be weighing in while taking a call on the rates.

"Any amendments in the inflation targets, and/or the establishment of a monetary policy committee to take rate decisions, will influence the direction of rates into the 2016 fiscal year," it said.