Interest rates likely to stay on hold in August: HSBC

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The RBI is likely to pause again in its policy review meet next month, an HSBC report has said, adding that there is a possibility of a rate hike by the central bank in the last quarter of this year.

According to the global financial services major, since the last RBI policy meet, data suggest accelerating growth and surprisingly mild inflation, both at the core and headline level.

However, sub-normal rains, still pose upside risks to food prices, it added.

In the June 3 policy review, RBI left key rates unchanged and unlocked about Rs 40,000 crore of funds by reducing the amount of deposits banks are required to park in government securities.

This was the second time in a row that interest rates were left unchanged amid demands for moderation to spur growth.

RBI's next credit policy review scheduled on August 5.

"The RBI is likely to stay on hold in August, and we push back our rate hike forecast to 4Q 2014 – the latter is a close call and predicated on an expected rise in food costs due to poor rains," the HSBC research note said.

Meanwhile, global economy has gathered speed, with the US and the UK leading the pack and in India, the growth outlook has improved noticeably, led by an improvement in domestic and external demand.

HSBC further said: "Weak food inflation in June encourages the central bank to give more time for the government's supply-side measures to work. At the same time, headline inflation is too close to the year-end target to make the RBI comfortable about doing away with rate hikes altogether."

"We think the RBI is likely to pause again in August to get a better sense of the inflation trajectory," HSBC added.

Retail inflation in June touched its lowest mark at 7.31 per cent since January 2012 and the wholesale price-based index slid to four-month low of 5.43 per cent mainly because of easing vegetables prices.

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