The consensus among market participants is that RBI Governor Raghuram Rajan will hold rates during his next policy announcement slated for tomorrow morning.

There have been expectations that in the backdrop of the recent Budget, the central bank would cut rates in order to provide a fillip to the economy. GDP growth rate in the current fiscal is expected to be in the 5.5% range, improving from 4.7% recorded in the last fiscal.

Experts however think that >high inflation and >the slightly erratic monsoon (recent rainfall has bridged the looming rain deficit from about 40% at the beginning of last month to about 25% currently), will force the governor’s hand and keep rates steady . The key policy rate, the repo, or the rate at which the RBI lends money to banks for short term liquidity purposes, is currently at 8 per cent.

Monsoon may be deciding factor

V.Lakshmi Narasimhan, Chief Financial Officer, Magma Fincorp, said, “In my view it will be status quo on the policy rate front. With monsoons in deficit of up to 25% thus far and crucial agri states not getting enough rains, the present inflation indicators are short term. So the Governor would, I am sure, like to watch at least until October before reversing the rates.”

HDFC Securities said in a note this morning, “We think the RBI will continue with its cautious attitude till the monsoons are over. While the July monsoons have been good, a dry spell is again seen from August 10. The Governor would not like to be a weather forecaster. He would rather wait.”

Noting that this was the first policy after the Budget announcement, it said that the Government had taken some commendable steps by not raising the minimum support prices too much and by coming down hard on on hoarders and selling excess stocks in the markets. Its limiting the fiscal deficit to 4.1% will also provide confidence to the governor,that the government will walk its talk and is an equal partner in the central bank’s fight against inflation, the note said.

HDFC Securities draws attention to the concerns across the Atlantic. Rise in wage inflation in the US and the expectation that the US Fed’s bond buying programe would end and interest rates rise soon could be a cause of worry for the RBI.

Is RBI under pressure?

So, will there be pressure from the government on the RBI to cut rates?

T.B.Kapali, Independent Financial Consultant, thinks the NDA government is almost indistinguishable from the UPA in terms of its approach to Government spending and overall economic philosophy too and feels there could be at least indirect pressure on the RBI to reduce its repo rate further.

He expects the RBI may again tinker with the Statutory Liquidity Ratio (SLR) to make available more lendable funds. He added, “Even if the RBI stands pat, I do not think it would make any noticeable difference to the overall financial markets / lending and economic environment. All of them remain quite weak and will not be impacted much by 25 bps rate moves.” Pointing to the latest RBI inflation expectations survey which showed households are expecting some 13/14 % inflation 1 year from now, Kapali said that unless those high expectations are broken, there will not be any sustainable improvement in the lending and economic environment.

He said, “Breaking those high inflation expectations is not going to come by 25 bps rate moves – and the Governor knows that also.”

Mr. Sumant Sinha, Chairman and CEO of ReNew Power said,“ While India Inc would like to see a softening of rates to stimulate demand and reduce the price of liquidity, the Governor has limited maneuvering room with regards to tomorrow’s repo rate change given a disappointing monsoon deficiency and its impact on food price pressure coupled with geo-political unrest that has ensured that India remains exposed to unrest around crude pricing volatility. A rate cut is therefore unlikely keeping in mind the RBI’s strong focus on easing inflation as well as its commitment to bring down CPI to 8 per cent by January 2015 and 6 per cent by January 2016.”

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