RBI panel to keep repo rate unchanged in June, say bankers

Outlook likely to be less hawkish; monsoon & GST roll-out to decide course of action

The Reserve Bank of India’s monetary policy committee (MPC) is expected to keep the repo rate — at which it lends to banks — unchanged when it meets early June to take stock of macroeconomic factors and behaviour of prices since April.

Many risks that were flagged then, including oil prices and inflation, have not turned adverse. But, the MPC might prefer to stick to its earlier policy stance. The focus would then be on the outlook of the committee, bankers said.

A senior State Bank of India executive said no rate cut action was expected in the June review, while the outlook might be less hawkish. How rains would spread over the country and the initial feedback over roll-out of the goods and service tax would weigh on the panel members’ minds.

Rating agency ICRA said the repo rate was likely to remain unchanged in the review and the policy tone would be less hawkish. Naresh Takkar, managing director and group chief executive officer of ICRA, accounted this to “the improved outlook for the monsoon, the GST rate structure and easing of commodity prices”, which had abated the inflation risks highlighted by the MPC in April.

“The MPC may choose to observe the actual progress of the monsoon and the adjustment during the transition to the GST, prior to reducing the policy rate or reversing the stance back to accommodative from neutral. Therefore, we expect the MPC to opt for a pause in the June 2017 policy review,” said Takkar. He also listed the Consumer Price Index-based inflation not falling below 4 per cent (the medium-term target) for six consecutive months and visible improvement in volume growth in a number of sectors after re-monetisation as factors for not cutting the repo rate.

While the improved monsoon prospects have subdued concerns about food inflation, the dip in reservoir levels and the extent of revision in minimum support prices were modest inflation risks. Food inflation was expected to be relatively benign in H1 FY2018 but a reversal of base effects could result in food inflation rising sharply to 4-5 per cent during H2 FY2017, it said.

At the April policy review, the central bank’s decision-making panel voted unanimously to keep rates unchanged. However, one member had before the vote made a case for an increase. Giving primacy to tackling inflation concerns, M Patra, executive director at the central bank and a member of the MPC, wanted a pre-emptive increase of 25 basis points (bps) in the rate.

In the February review, the decision was to change the policy stance from “accommodative” to “neutral”. The panel met again on April 5 and 6. It decided to continue with a neutral stance. It had cut the repo rate by 175 bps from January 2015.

Expecting a rate cut in the June review, one public sector bank official said a 25-bps cut in the repo would give a positive signal. Taking a cue from such a change, commercial banks would reduce their marginal cost-based lending rates. Else, banks would prefer to stay with existing MCLR rates.

The Confederation of Indian Industry had on Sunday said the time was apt for the Reserve Bank to cut interest rates, as inflation might remain at moderate levels.