With retail inflation picking up in April, the Reserve Bank of India is likely to keep rates unchanged in its upcoming monetary policy review on Tuesday. The likelihood of the US Federal Reserve hiking its rates later in June and the unpredictability linked to monsoons are the other reasons why the RBI may choose to adopt a wait-and-watch approach.
Retail inflation, measured by the consumer price index (CPI), jumped to 5.39 per cent in April 2016, against 4.83 per cent in the previous month. For the Reserve Bank, CPI is the nominal anchor in formulating monetary policy.
“A few other factors important for the RBI’s monetary policy stance are — the Fed’s rate decision later in the month, Brexit (exit of the UK from the European Union) and the performance of monsoons. On all these counts, it is unlikely that any event will be disruptive for the global/Indian financial markets,” India Ratings and Research (Ind-Ra) said in a report.
The central bank had cut the repo rate — the interest rate at which banks borrow short-term funds from the RBI to tide over short-term liquidity mismatches — on April 5, from 6.75 per cent to 6.50 per cent.
Focus on inflation
The Ind-Ra report said that though there is room for the RBI to cut rates by another 25 basis points in FY17, it is unlikely to happen now. Instead, the RBI is likely to focus on inflation control, liquidity management and the pending policy transmission.
The credit rating agency observed that concerns with respect to food inflation are unlikely to go away, despite the prediction of an above-normal monsoon.
The uptick in brent crude prices and domestically higher minimum support prices will also push up headline inflation. Prices of global crude oil have risen from under $40 a barrel in March, to levels of around $50 per barrel, raising concerns of a cascading impact on inflation.
HSBC Securities and Capital Markets (India) has observed that the RBI has to consider several uncertainties at the global level and unclear domestic growth signals to determine its policy direction.
“While waiting for the rain season to pan out, we expect the RBI to stay on hold in the upcoming June 7 policy meeting. We continue to hold on to our call for a 25 basis points rate cut in August, on the back of our assumption that rains will be normal,” said Pranjul Bhandari, Chief India Economist, and Prithviraj Srinivas, Economist, HSBC Securities and Capital Markets (India).