Two days of hectic decision making by the government have seen the diesel price raised and foreign direct investment in two key sectors — aviation and multi-brand retail — allowed; yet, the Reserve Bank of India (RBI) may still keep rates unchanged.
Eighty five per cent respondents in a Business Standard poll see the central bank maintaining status quo on rates in its monetary policy review on Monday.
The man at the helm, RBI Governor D Subbarao, is surely feeling the heat, to do his bit. He had justified status quo at the two previous policy meetings, indicating the government had not delivered its promises on fiscal consolidation. In April, he reduced the key interest rate (repo rate) by 50 basis points to eight per cent, even as the inflation rate stayed above seven per cent, hoping the government would put its house in order. The rate cut in April was the first time in three years, but it was followed by a series of hawkish statements by RBI, where efforts were made to distance the central bank from the responsibility of the dwindling economic growth.
Yesterday’s diesel price hike, which signalled the government’s willingness to take the path of fiscal prudence, would be appreciated by Subbarao. But, will he be in a hurry to reduce the rate, even as the inflation rate jumped to 7.55 per cent in August, from 6.87 per cent the previous month?
Motilal Oswal Securities said it would be a tough call for RBI, as quite a few contradictory signals, like stagnation in industrial production, slowing GDP growth, high inflation and a potential impact of QE3 on commodities inflation, had emerged. The broking firm sees a 25-basis-point rate cut still possible, but not imminent.
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“Today’s (inflation) data make life easier for RBI. With inflation at 7.6 per cent and price pressure likely to persist, owing to the 14 per cent diesel price increase, there is little chance for inflation to fall below seven per cent until early 2013,” said Deutsche Bank in a note, arguing RBI would have no problem in defending its unchanged monetary policy stance.
“RBI would like to bring inflation under control a rate cut. The diesel price hike is likely to put further pressure on inflation,” said Angel Broking CMD Dinesh Thakkar.
Bank of America Merrill Lynch’s India economist, Indranil Sen Gupta, says while RBI may not cut the repo rate, it may reduce the cash reserve ratio by 25 basis points. “This (diesel price hike) supports our case for a 25-basis-point CRR cut — if not a rate cut — in Monday’s policy review,” he said.
A section of the market participants said RBI would cut its rate only in October.
“Despite the government finally biting the bullet on fuel price revisions, we continue to expect RBI to maintain a status quo on Monday. However, the revision in fuel prices and the concomitant fiscal adjustment would give RBI a greater room to cut policy rate (expect 50 bps cut) in Q3 FY13,” said Shubhada Rao, chief economist, YES Bank.