Inflation concerns may force RBI to maintain status-quo on policy rates

By: | Published: August 8, 2016 12:14 PM

RBI monetary policy review: The central bank is likely to maintain a 'wait and watch' policy in the monetary policy review on August 9, said Religare Institutional Research.

RBI monetary policy reviewRBI monetary policy review: The central bank is likely to maintain a ‘wait and watch’ policy in the monetary policy review on August 9, said Religare Institutional Research. (Photo: Reuters)

Inflation concerns may force the Reserve Bank of India to maintain status-quo on policy rates, according to Religare Institutional Research. It has said that the central bank is likely to maintain a ‘wait and watch’ policy in the monetary policy review on August 9.

“Higher-than expected inflation prints over the last three months are expected to keep the RBI in a wait and watch mode in its third bi-monthly monetary policy review for FY17. We believe that there is limited headroom for further rate cuts at the current juncture and any further space to cut rates would be a function of disinflation. Nevertheless, the stance of the new RBI governor and MPC members would play a key role in determining the path of policy rates,” Religare has mentioned.

It has pointed out that retail inflation, as measured by the Consumer Price Index (CPI), has remained elevated in the recent months and has averaged at 5.7 per cent during Q1FY17 as against the RBI’s projection of 5.3 per cent, on the back of a surge in food prices (vegetables, sugar and pulses). “The July CPI number is also likely to remain elevated, amidst no signs of easing food inflation in the month. Thus, RBI is likely to stay put in the upcoming monetary policy review,” Religare has said.

It pointed out RBI has maintained its preference for keeping real interest rate (12-month T-Bill rate minus inflation) in the 1.5-2 per cent range. The real rate declined to 1.9 per cent in Q1FY17 from 2.26 per cent in Q4FY16. “Given this, we believe India is close to the end of the rate cut cycle and that there is room for just one more rate cut (of 25 bps) in FY17. In the longer term, any further space to cut rates would be a function of further disinflation,” Religare said..

However, it has pointed out some positive signals for the economy including a good monsoon. India has recorded rainfall at 1 per cent above the long period aveage (LPA) during the first half of the southwest monsoon season, which in turn has led to a pick-up in reservoir levels to close to historical average levels. Sowing is up by 5.2 per cent, especially pulses which is up by a sharp 35 per cent YoY which could translate into record output.

Religare mentions that pulses inflation in India has hovered at over 20 percent during the last 12 months and administrative measures have also contributed to it. Besides, while implementing the 7th Pay Commission, the government deferred the hike in house rent allowance (HRA), thereby mitigating the direct impact on inflation.

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