The Reserve Bank of India (RBI) is likely to take a pause from raising rates in its next policy meet in September, as fears of a global economic slowdown and its cascading effects on the Indian economy intensified after Standard & Poor’s (S&P) downgraded the long-term debt rating of the US last week.
On Friday, after the US market hours, S&P reduced its long-term credit rating of the US from AAAto AA+, raising concerns of another economic slowdown. With domestic demand already expected to shrink because of sharp rise in interest rates in the last 12 months, economists said RBI was expected to wait for some time to take stock of the situation before increasing rates further.
The mellowing of commodity prices, especially of crude oil, is also expected to provide RBI some breathing space in its battle against inflation. “I do not see any more policy rate hikes by RBI if the oil prices cool off and if there is a double-dip as predicted in the US,” A Prasanna, chief economist of ICICI Securities Primary Dealership, told Business Standard.
Besides downgrading of the US’ rating, the persistence of debt crisis in the euro zone has also added to the uncertainties in global economies. “Though the developments in Europe and US increase risks for the economy, easing global commodity prices is big plus. RBI may get room to tweak its policy stance and could take a pause,” said Brinda Jagirdar, head of economic research and general manager of State Bank of India.
RBI has increased the policy rates 11 times in the last 16 months to combat inflation, at the cost of growth moderation. In its latest policy review in July, the central bank raised key rates by as much as 50 basis points. RBI governor D Subbarao has also reiterated that the central bank’s monetary tightening stance will continue till inflation stays high.
According to economists, however, softening of global commodity prices will ease the pressure on domestic inflation. “Our policy call that RBI will increase the repo rate by a further 25-50 basis points by March 2012 could be put to test in the event that commodity prices globally come down sharply and risk aversion is significant,” said Indranil Pan, chief economist, Kotal Mahindra Bank.
While YES Bank continues to keep its 25-basis point policy rate rise forecast in September, its chief economist, Shubhada Rao, said rate rise action would depend on economic indicators like gross domestic product, industrial output growth and global commodity prices. “Volatility in markets will not be an adequate measure for RBI to change its monetary stance,” she said.