Monsoon, Fed impact next trigger for RBI rate cuts: Moody’s

By: | Updated: August 4, 2015 3:40 PM

The progress of monsoon, crude prices and the impact of US Fed rate action, going forward, will determine RBI's ability for more monetary easing, said global rating agency Moody's.

reserve bank of indiaReserve Bank of India on Tuesday kept the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 7.25 per cent in its monetary policy review.

The progress of monsoon, crude prices and the impact of US Fed rate action, going forward, will determine RBI’s ability for more monetary easing, said global rating agency Moody’s.

Soon after the third bi-monthly monetary policy review of this fiscal by the Reserve Bank on Tuesday, wherein it went for a status quo, Moody’s Investors Service today said, “Trends in monsoon rainfalls and global crude prices, coupled with the domestic economy’s ability to absorb US Fed tightening, will determine whether additional monetary easing is forthcoming later in the year.”


It also noted that RBI kept policy rate on hold to evaluate the impact of the reduction of 75 basis points in the key benchmark rate since January.

The central bank reasoned that it has successfully reined in medium-term price expectations in recent quarters, and listed out factors, including the recent uptick in consumer price inflation and a likely policy tightening by the US Fed, behind its neutral policy move.

For a change, the market was expecting Governor Raghuram Rajan to hold rates this time around.

Apparently, Rajan has ignored pressure to loosen policy, citing a spike in food prices and banks not lowering their rates even after three cuts totaling 75 bps by him. The banks have so far passed on only 30 bps to borrowers.

“Given that policy action was front-loaded in June, it is prudent to keep the policy rate unchanged at the current juncture while maintaining the accommodative stance of monetary policy. We will look for more room to ease policy rate depending on fuller transmission of rate cuts by banks, food prices and US Fed normalisation signs,” Rajan said.

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