RBI Monetary Policy Review: This is why MPC may not go for a rate cut

New Delhi: Despite rising shrill calls for a fiscal and monetary boost after Q1 GDP slipped to a three-year low of 5.7 percent, Reserve Bank is likely to leave policy rates unchanged in the forthcoming policy review as it expects a spike in retail inflation going ahead.

Retail inflation rose to a five-month high of 3.36 percent in August from 2.36 percent in July. August inflation number was the highest since March 2017, when it was recorded at 3.89 percent.

The RBI's monetary policy committee (MPC), which will deliberate over two days from Tuesday to decide on the fourth policy review of the fiscal, has the mandate to target an annual retail inflation rate of 4 percent, with a band of 2 percent in either direction.

In its last policy review in August, the RBI reduced the repo rate by 0.25 percent to 6 percent, citing reduction in inflation risks. The rate cut was the first in 10 months and brought policy rates to a near 7-year low.

The government, however, expects a helping hand from the RBI in the form of interest rate cut on Wednesday to boost growth.

Several experts and industry bodies too have made a strong case for lowering of the key interest rate in view of subdued inflation and the urgency to propel economic growth which appears to be reeling under the impact of demonetisation and GST implementation.

However, bankers are of the view that the Reserve Bank of India (RBI) would hold its key repo rate at a seven-year low of 6 percent as inflation has seen witnessed an increase.

Similarly, the reverse repo rate is expected to be left at 5.75 percent across the same period.

According to a SBI report, the RBI is likely to maintain status quo on key lending rate in its October 4 policy decision as it is "stuck in a conundrum" of low growth, mild inflation and global uncertainties.

It said that against the background of flexible inflation targeting, the obvious question that arises is choosing between - the move towards the 4 per cent inflation target swiftly or staying in the inflation band.

"We expect the RBI to stay on hold at the upcoming meeting as rising incoming inflation and projections of further acceleration in inflation ahead will mean that there would be limited space for further easing," Morgan Stanley said in the research note.

India Inc has already made a pitch for rate cut by RBI to perk up economic activity.

Assocham has written to the Reserve Bank of India and the Monetary Policy Committee to cut the interest rates at least by 25 basis points, given the challenges being faced by the economy which needs immediate measures for revival of growth.

"At least 50 basis points elbow room can be taken with regard to 3.2 percent fiscal deficit for the current year and the next financial year," the chamber said.

Asia's third-largest economy started losing momentum after the government scrapped 86 percent of currency in circulation late last year, hurting demand in the cash-reliant economy, and the slowdown was compounded by the implementation of a new tax system.