Business Standard

Tuesday, December 24, 2024 | 09:00 AM ISTEN Hindi

Notification Icon
userprofile IconSearch

RBI expected to be less hawkish, may leave interest rates unchanged

RBI to look at monsoon distribution, the impact of GST and pay hike

RBI expected to be less hawkish, may leave interest rates unchanged

Reuters Mumbai

The Reserve Bank of India (RBI) will likely strike a less hawkish tone while leaving interest rates unchanged at a policy meeting on Wednesday, according to analysts, as inflation is running well below forecasts, and the economy has slowed more than expected.

A Reuters poll showed 56 of 60 analysts expected the RBI's monetary policy committee to keep its repo rate unchanged at a 6-1/2 year low of 6.25 per cent for the fourth meeting in a row. They also expected the reverse repo rate to be left at 6.00 per cent.

What analysts and investors are looking for this time is a less hawkish policy statement to reflect reduced fears of inflationary pressures.

 

Until a few weeks ago, bond market investors were on guard for possible future increases in interest rates after the RBI warned of "upside risks" to inflation at its last policy meeting in April.

"We don't expect any change in the official neutral stance in June but we do expect RBI to tone down its hawkishness compared to the April and February policy statements," said Siddhartha Sanyal, chief India economist at Barclays.

Investors have begun pricing in a softer tone from the RBI, with benchmark 10-year bond yields down about 35 basis points since hitting an over 7-month high on May 2. Some bolder investors are even betting on possible future rate cuts.

Consumer price inflation data for May will be released next week, but going by the April figures inflation is trending well below the RBI's target of 4.5 per cent in the six months to September, and 5.0 per cent for the six months through to March next year.

Notching its lowest annual rate in at least five years, consumer price inflation slowed to 2.99 per cent in April from 3.89 percent in March, just below the RBI's target of 4.0 per cent.

Meantime, the economy suffered a sharper setback than many economists had expected from the government's shock move last November to take high denomination currency bills out of circulation in a bid to curb tax avoidance.

Gross domestic product (GDP) grew 6.1 per cent in January-March, down from 7 per cent the previous quarter, to post it slowest growth rate in more than two years.

Investors' uncertainty over the RBI's stance was heightened by the release of minutes from the April meeting of the monetary policy committee which showed two of its six members had proposed rate hikes, before the committee ultimately voted 6-0 to leave rates unchanged.

The RBI had justified its hawkish stance citing the impact of planned pay hikes for government employees, an introduction of goods and service tax (GST) and fears of a weaker-than-expected monsoon.

Monsoon rains, however, arrived ahead of schedule this month and are forecast to be above-average, and the government has avoided jacking up GST rates except for certain items it considers luxuries, including movie tickets.

An around 5 per cent rally in the rupee against the dollar this year could further ease inflation, while global commodity prices have eased.

HSBC said it still saw the possibility of a rate cut in August, a move the RBI could set up by adjusting its inflation projections. The central bank had changed its monetary policy to "neutral" from "accommodative" in February, leaving it open to raise, or lower, rates in months ahead.

"It's time the RBI adjusts its inflation forecasts to strengthen its credibility," HSBC said in a recent note to clients.

Don't miss the most important news and views of the day. Get them on our Telegram channel

First Published: Jun 06 2017 | 1:45 PM IST

Explore News