In a sea of uncertainty, the Reserve Bank of India (RBI) is widely expected to keep its policy interest rate unchanged at a 5-year low of 6.50 percent on Tuesday. But more than the repo rate, the markets are looking at whether Governor Raghuram Rajan’s term, which ends in September, will get an extension. Here are the top 5 things to watch today:
1. RBI monetary policy is expected to signal the prospect of a repo rate cut later this year if monsoon rains dampen upward pressure on food prices.
2. The much-respected, but recently under-fire, from the ruling BJP leader Subramanian Swamy, Reserve Bank of India Governor Raghuram Rajan, a much admired former International Monetary Fund chief economist, could be chairing his penultimate policy review, with investors waiting to hear whether the government plans to extend his three-year term beyond September. Expectations are that he was likely to be offered another two years, should he want it, but markets were spooked after a report cited sources close to Rajan saying he could walk away from the job.
3. Regardless of whether Rajan stays or goes, most economists reckon he could cut the repo rate by 25 basis points between July and September – possibly the last reduction of an easing cycle – if forecasts for good rains prove correct. In a poll, all but one of the 44 economists taking part predicted the RBI will leave rates unchanged for now.
4. Growth of 7.9 percent in the March quarter cemented India’s ranking as the world’s fastest growing large economy, yet it needs even faster growth to create jobs for millions of youngsters joining the workforce. Though private investment is subdued, the RBI’s priority is expected to stay focussed on meeting inflation targets of 5 percent by March 2017 and 4 percent over the medium term.
5. Helped by an oil price slump, Rajan has cut the repo rate by 150 bps since January 2015 – including a 25 bps reduction in early April – but there are now reasons to pause. Annual consumer price inflation accelerated to 5.39 percent in April, crude prices are well off January’s more than 12-year lows, a U.S. rate hike is anticipated, and any shortfall in rain could ignite food prices. That means, for now, economists say, Rajan is expected to focus on persuading banks to pass on benefits of earlier RBI rate cuts to borrowers, as they have only lowered lending rates by 65 bps since early 2015.