RBI likely to maintain status quo on Tuesday

This is going to be the last bi-monthly monetary policy to be decided by Raghuram Rajan before his retirement

Reserve Bank Governor Raghuram Rajan is widely expected to hold the key interest rate in his last monetary policy review on Tuesday as retail inflation continues to be above the comfort zone.

Rajan, whose 3-year term will come to an end on September 4, may prefer that RBI assesses the full impact of monsoon rains before taking a view on the interest rate.

This is going to be the last bi-monthly monetary policy to be decided by the central bank Governor as the broad-based 6-member panel may take over the job before the next review on October 4.

In conjunction with naming its 3 members on the Monetary Policy Committee, the government is also likely to name a successor to Rajan sometime this month.

The government announced last week that it would like the RBI to focus on maintaining retail inflation rate of 4 per cent for the next five years, based on which the new interest rate setting panel would take its monetary policy decisions going forward.

The move, which provides for a margin of plus or minus 2 per cent in this target thus fixing the upper tolerance level at 6 per cent till 2021, is being seen as government putting the seal on Rajan's inflation-first model of monetary policy.

"We are expecting that there will be no change in rate because vegetable prices are on the rise... It will take a few months for the vegetable prices to come down when the kharif crops come into the market," SBI Chairperson Arundhati Bhattacharya said.

Consumer Price Index based retail inflation rose by 5.77 per cent in June, the fastest pace in 22 months and it is expected that the implementation of the new Goods and Services Tax (GST) may push it up further.

However, Yes Bank Managing Director Rana Kapoor believes that macroeconomic conditions augurs well for at least 50 basis point cut in interest rate by the RBI.

He said rates are coming down across geographies including the UK, which has strengthened the case for rate cut by RBI.

"There are lot of favourable developments in the economy — above average monsoon, low G-Sec rate, high forex reserve, low bond yield, twin deficit well within the range — augurs well for rate cut of at least 0.5 per cent," he said.

Rajan, criticised for following hawkish monetary policy for too long before starting to lower rates, has reduced the benchmark interest rate by 1.5 per cent since January last year, and has been persuading banks to fully transmit the benefit of the policy rate cut to customers.