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While at least 25-bp rate cut along with liquidity infusion measures have been factored in from the Reserve Bank of India’s annual policy which will be announced on Friday, market participants will look if there is a shift in the policy stance.
Though the central bank has reduced interest rate in the last two policy statements, in January and March but declined to drop the guard on inflation.
In the March policy, RBI had said further scope for rate cut limited citing the wedge between retail and wholesale inflation and also widening current account deficit.
The market is now waiting to see of the stance is change to pro-growth, from anti-inflationary.
The consecutive drop in headline inflation for two months, along with softening of global commodity prices which will have favourable impact on both inflation and current account deficit, may help the central bank to adopt a more pro-growth approach. In addition, benign core inflation is also seen to be a comforting factor for the policy makers at Mint Road.
“Growth will receive a larger focus. The stance will be less hawkish as compared with the previous policy statement. While there would be lingering concerns on Consumer Price Index (CPI) and yet wide Current Account Deficit (CAD) but the tone of policy statement will be significantly less hawkish compared with the previous policy statement,” said Shubhada Rao, chief economist, Yes Bank.
According to market participants, if RBI acknowledges benign interest rate regime is crucial for revival of investment and economic growth, then the possibility of future rate cuts will increase.
The main reason for RBI not to drop the guard on inflation and continue with a hawkish tone, will be because of high consumer price inflation.
“RBI will take a cautious stance and reiterate that the recent developments in terms of softening of inflation and commodity prices, if the trend continues then probably there can be more rate cuts. But I do not think they will give a clear signal of more rate cuts as on May 3 because they are very conditional that way. RBI will wait and watch to see how things pan out. The guidance may not be as hard as it was in March. They will have to acknowledge the recent developments, but they will not let down their vision on inflation,” said Anubhuti Sahay, economist at Standard Chartered Bank.
In the previous fiscal RBI had cut the repo rate by 100 basis points in three tranches. In April 2012 the repo rate was cut by 50 basis points and it was cut further by 25 basis points each time in January and March.
The repo rate currently stands at 7.50%.
The Wholesale Price Index (WPI) for March rose 5.96% after an annual uptick to 6.84% in February. While CPI slowed to 10.39% in March compared with 10.91% in February. But CPI continues to be sticky.
