RBI monetary policy review today; rate cut unlikely

New Delhi: The Reserve Bank of India (RBI) is likely to hold the key rate in its monetary policy review on Wednesday following a jump in inflation

The Monetary Policy Committee headed by RBI governor Urjit Patel started two-day deliberations yesterday with industry and the government hoping for interest rate cut to spur growth which fell to 3-year low of 5.7 percent in the June quarter, while experts expect status quo.

While core inflation in August rose to 3.36 percent, high food and fuel prices pushed wholesale inflation at 3.24 percent, to nearly double of that over the previous month.

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 reduction in August came after four consecutive policy reviews in which the RBI had maintained status quo on its repo, or short-term lending rate, since the reduction by 0.25 percent to 6.25 percent in October 2016.

State-run State Bank of India (SBI), in a report titled "RBI caught in a bind: Expect status quo on October 4, 2017", said the apex bank faced a difficult decision on cutting its lending rate.

"On the eve of the forthcoming monetary and credit policy, the central bank is stuck in a conundrum of low growth, mild inflation, saving financialisation and external uncertainties. This will make the job difficult for the RBI on October 4," the SBI Ecowrap report said.

"The obvious question that arises is choosing between (a) the move towards the 4 percent inflation target swiftly, or (b) staying in the inflation band," said SBI Chief Economic Adviser Soumya Kanti Ghosh.

"In hindsight, if the central bank moves towards the 4 percent target in January 2018 as was suggested earlier, there would be limited room for rate cut in forthcoming policies."

Domestic credit rating agency ICRA also discounted the possibility of an RBI rate cut.

"We do not expect a rate cut in the upcoming policy review as consumer price index (CPI) inflation is expected to chart an upward trajectory over the coming months, and print between 4.5 percent and 5 percent in March 2018," ICRA MD Naresh Takkar said in a report earlier this week.

Instead, the drop in GDP growth during the first quarter, has provoked strident Arate cut calls from industry, which wants urgent steps to revive private investments.

Pulled down by sluggish manufacturing, growth in the Indian economy, during April to June, fell to 5.7 percent, clocking the lowest GDP growth rate under the Narendra Modi dispensation.

According to the American financial services firm Morgan Stanley, the RBI is expected to hold rates while maintaining its neutral policy stance.

"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 a research note.

With Agency Inputs