RBI may not cut interest rates as inflation levels still high

Written by PTI | Mumbai | Updated: Sep 28 2014, 20:47pm hrs
With retail inflation continuing to remain at elevated level, the Reserve Bank is unlikely to cut interest rates in its upcoming monetary policy review this week.

The RBI will unveil its fourth bi-monthly policy on September 30.

Although consumer price index (CPI), which the central bank is monitoring closely, has shown a declining trend in the past few months, the levels are still out of its comfort zone.

RBI has set a glide path for CPI inflation at 8 per cent by January 15 and 6 per cent by January 2016.

Retail inflation or CPI eased to 7.8 per cent in August from 8.59 per cent in April.

Wholesale price index (WPI) inflation has also eased, although more sharply, to 3.74 per cent in August from 5.55 per cent at the start of the current fiscal.

Banking experts however still believe that it may not be time for rate cut yet.

State Bank of India chairperson Arundhati Bhattacharya said: "RBI is likely keep interest rate unchanged."

Echoing the similar view, Bank of Baroda Executive Director Rajan Dhawan told PTI: "I think RBI would not change interest rate in the policy review because of inflation overhang."

Credit rating agency Care Rating said RBI has less room to cut policy rates on September 30 as there remains an upward threats to inflation going ahead.

"Given the economic parameters of improving growth of 5.7 per cent (Q1 FY15) GDP and elevated retail inflation on the back of potential threats to inflation going ahead, we do not foresee any room for a rate cut in the upcoming policy announcement," Care said in a report.

In a hint to the market that the cut in interest rates is still far away, RBI Governor Raghuram Rajan had recently said there was a need to 'break the back' of inflation which remains high.

"The real problem is inflation that is persistent. We have been emphasising again and again in order to 'break the back' of inflation, we got to break this persistence," Rajan had said at an event.

Rajan had said that RBI will be in a much more comfortable position once inflation is contained.

"I have no desire to keep interest rates high for even a second longer. I want to bring down interest rates when feasible. It will be feasible when we would have won the fight against inflation," he had said at a banking event earlier this month.

Canara Bank chairman and managing director R K Dubey said RBI will lower the rates only if inflation comes down consistently for a few months.

"So, I expect some change in rates only by January," Dubey said.

Market participants, however, will closely watch the tone of the monetary policy.

In the last monetary policy review in August, RBI, for the third consecutive time, left the repo rate unchanged at 8 per cent.

It, however, lowered the Statutory Liquidity Ratio, the portion of deposits that banks are required to keep in government bonds, by 0.5 per cent to 22 per cent from 22.5 per cent to unlock about Rs 40,000 crore into the system.

According to Care Rating, RBI may not cut SLR on September 30 but even if it slashes SLR it won't come as a surprise.

"It (SLR cut) could probably be a part of the long term goal of lowering the SLR rather than a short term measure," Care Rating said.

Indian Banks Association chief executive M V Tanksale said there was no need for a SLR cut now as credit pick up is slow and also there was no urgent need of liquidity.