RBI Governor Raghuram Rajan is widely expected to maintain a status quo as it meets for the bi-monthly monetary policy review on Tuesday.
After a gap of six months, RBI had cut repo rate, at which it lends to other banks, by 0.25 per cent to 6.5 per cent in April. It was the first monetary policy review of financial year 2016-17.
“We believe India is near the end of the monetary easing cycle as (1) core inflation has remained sticky with no signs of abating and (2) overall inflation carries upside risks (oil prices, 7th CPC). The RBI is likely to institute a final 25 bps rate cut not before August 16, followed by a long pause,” Religare Institutional Research said.
Below are the five reasons why Rajan may not go for a rate cut:
Inflation: RBI may keep a close watch on further inflation figures keeping into account the oil price level. Retail inflation soared to 5.39 per cent in April on higher food prices, reversing a downward trend seen in recent months. Crude oil price is also looking up and has touched $50 a barrel, from a low of about $30 per barrel, and could increase inflationary pressures.
Monsoon watch: Although there is a prediction of good monsoon this year, RBI Governor Raghuram Rajan will closely watch monsoon progress and its impact on the inflation. “We expect the RBI to pause on rates on Tuesday as we await clarity on monsoons to dampen the recent temporary spike in inflation. It will likely reiterate its dovish April view to watch macroeconomic and financial developments in the months ahead with a view to responding with monetary action as space opens up,” BoFA-ML said.
Economic growth: According to the latest data, India’s economy grew at a robust rate of 7.9% for the last quarter of FY16. Rate cuts are normally seen as a necessary booster shot for growth, but given that GDP data paints a stable macroeconomic picture, Rajan may find reason to hold rates.
US Fed meet: The central bank will keenly watch the US Fed meet slated on June 14-15 to decided the further course on rates. The US Federal Reserve may delay an interest rate rise at its June meeting due to concern over economic fallout of Britain’s impending vote on whether to leave the European Union, according to Reuters analysis.
Liquidity: Sahil Kapoor, Chief Market Strategist at Edelweiss Securities tells FE Online, Rajan has already done a lot to inject liquidity into the economy, constant open market operations (OMOs) are being conducted. He would ideally want to see the effect of his move on the liquidity front.