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India: Bankers expect the RBI to maintain status quo on rates at the monetary policy

2014/05/29

Bankers expect the Reserve Bank of India (RBI) to maintain status quo on rates at the monetary policy review on Tuesday as retail inflation is yet to show signs of slowing down. The RBI has been tracking consumer price inflation closely and, according to the report of a committee headed by deputy governor Urjit Patel, it is targeting to bring consumer price index (CPI) inflation down to 8% by the end of January 2015 and 6% by January 2016.

Bankers point out that since the CPI hit a three-month high in April, RBI is likely to keep policy rates on hold. “Except for the sentiment, nothing has changed yet and, so, we think RBI will not opt for changes in policy rates,” said RK Dubey, chairman & managing director, Canara Bank.

Retail inflation hit a high of 11.16% in November last year and stood at 8.59% in April, driven by higher food prices.

“The market is not expecting any change in policy rates and the April CPI data is the main reason,” said Arun Kaul, chairman & managing director, UCO Bank.

In the April policy, RBI had said that

there are risks to the central forecast of

8% CPI inflation by January 2015 due to a less-than-normal monsoon.

“The Reserve Bank of India has reiterated that inflation control was a priority and the bank will also attempt to balance growth-inflation objectives. We look for the repo to be left unchanged next week,” DBS Bank India said in a note. RBI governor Raghuram Rajan has raised the key repo rate thrice since taking over the reins of the apex bank in September, 2013. In January, the repo rate hike was seen as a surprise move as the market was expecting a pause.

“We note that the RBI is unlikely to cut policy rates in FY 2015, given high CPI inflation through FY15,” a recent report by Kotak Institutional Securities said. However, in April, RBI had kept the rates on hold and indicated that RBI will keep rates steady in the near term if inflation eases towards its targeted level. “I do not expect change in rates from RBI as inflation is still not at its comfort level,” said MS Raghavan, chairman & managing director, IDBI Bank.

Foreign brokerage Barclays expects that going forward inflation could moderate, which should lead to easing of interest rate by the central bank. “With favourable government policies, we expect an improvement in sentiment that could lead to the beginning of the next growth cycle in India,” Barclays said in a note last week.

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