RBI to keep rates on hold next week as inflation eases

Tags: RBI, Banking
The Reserve Bank of India (RBI) is expected to keep its key interest rate steady at 8 percent on April 1 as inflation has eased, according to all 53 economists polled by Reuters.

In his fight to lower stubbornly high inflation, RBI chief Raghuram Rajan has hiked interest rates thrice since he took over in September, surprising markets on two of those occasions.

But the RBI is expected to hold fire next week after February wholesale price inflation slowed to below the central bank's commonly perceived 5 percent comfort level for the first time in 9 months and retail price rises eased to a 25-month low.

The poll showed the RBI will keep the repo rate unchanged at 8.0 percent until at least October while the cash reserve ratio won't be changed from 4.0 percent until July 2015 at the earliest - the end of the forecast horizon.

"A status quo looks likely, given that the RBI is under no immediate pressure to take action given the dip in both CPI and WPI," said Vishnu Varathan, an economist at Mizuho Bank.

Wholesale prices rose a slower than expected 4.68 percent in February as food and fuel prices moderated while consumer price inflation eased for third straight month to a 25-month low of 8.10 percent.

The poll suggested the RBI's next move will be a cut although a few economists chose not to provide forecasts for the rest of the year, saying they were unable to make predictions before the results of national elections due to start in two weeks.

Investors' confidence has been revived in recent weeks on the likelihood the elections will usher in a new government led by the opposition Bharatiya Janata Party, which widely perceived to be more business-friendly.

Indeed, the rupee has been touching seven-month highs while the stock market has set successive records, with foreign investors particularly heavy buyers of shares.

Banking shares have led the gains on optimism about a looming recovery in the economy, which is expected to have grown at its slowest pace in a decade, and bets the RBI would keep interest rates on hold for now.

Despite the market euphoria in the run-up to the elections, analysts cautioned that inflation, high borrowing rates, weak industrial output and subdued demand are among the main economic risk facing the next government.

"We need a government which continues on the path of fiscal consolidation and if it (the new government) does that then there will be space for monetary policy easing," said Ashutosh Datar, an economist at IIFL.

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