RBI likely to hold rates despite drop in inflation

Tags: News
Bankers expect the Reserve Bank of India (RBI) to hold policy rates steady when it unveils the third quarter money policy review on January 28 in order to get a firmer grip on inflation.

To ease liquidity further, the central bank will likely introduce a 56-day repo lending facility alongside the existing overnight, seven-day and 14-day repo windows, they feel.

The forthcoming meeting of the US Federal Open Market Committee (FOM­C), slated for January 28 and 29, where the Federal Reserve will take a call on further reduction in quantitative easing, may also force the RBI governor’s hands.

Core inflation, which measures inflation in non-food manufacturing, rose marginally to 2.8 per cent in December, but was pretty close to RBI’s threshold of 3 per cent.

WPI inflation fell to 6.2 per cent in December 2013 from 7.5 per cent in the previous month, but consumer price inflation or CPI remained above 8 per cent.

Led by a sharp drop in vegetable prices, December primary inflation came down to 10.8 per cent from near 16 per cent in November, driving the overall inflation down.

NS Venkatesh, head of treasury at IDBI Bank, says, “RBI may hold rates to anchor its inflation expectations. Even though inflation has slid, RBI will prefer to have a firmer grip on it. The Urjit Patel panel recommendations for achieving 6 per cent CPI in two years will weigh on the governor’s mind.”

Venkatesh says using the CPI as an anchor price for money policy formulation is a good idea, as it impacts retail investors and savers. “The growth dynamics of the economy will not bother RBI too much at this point. When inflation is reined in, growth will be a natural corollary,” he says.

Most bankers believe the 2.1 per cent contraction in industrial production (IIP) in December will be tackled once the inflation is brought under control.

Rating agency Crisil says the magnitude of pick-up in core inflation and the Urjit Patel committee recommendations would determine the future course of RBI’s money policy action. Crisil’s own core inflation indicator (CCII), an alternative measure, remained unchanged at 3.2 per cent in December while CPI core inflation stayed above 8 per cent.

ING Vysya Bank economist Upasna Bhardwaj feels RBI will prefer a wait-and-watch approach in the January 28 policy, as headline inflation has started moderating and the rupee and commodity prices have stabilised in a narrow range.

“We do expect moderation in CPI over the next year (in the absence of any adverse supply-side shock), but achieving and sustaining near-6 per cent CPI in two years looks unlikely in the absence of aggressive policy initiatives to augment production,” she said.

A Royal Bank of Scotland survey among its corporate clients on Thursday showed a majority of market participants did not anticipate any rate cut, but status quo. Gyan Harlalka, MD and head of markets at RBS India, said 80 per cent of the 150 local market participants who took part in the survey didn’t expect any change in repo rate or CRR.

Reuters adds: The median consensus from a poll showed 45 of 50 economists expect the repo rate to be kept unchanged and steady until September before being cut by 25 basis points in the last quarter. If the RBI does follow through, that would signal an end to the current cycle of policy curbs.

“We expect RBI to maintain its current policy while acknowledging upside risks to inflation next week,” said Arun Singh, economist at Dun & Bradstreet. “While overall headline inflation has fallen recently, there is a risk it could head higher since it is not being driven by manufactured goods, which can be controlled by monetary policy, but by the price of food which is largely affected by supply-side rigidities.”

RBI’s focus is unlikely to change, especially after the Urjit Patel committee’s recommendation. But economists are wary of it’s effects.

“We’re not in favour of a fixed inflation targeting scenario and don’t think it is applicable or proper for developing economies,” said Shivom Chakravarty, economist at HDFC Bank.

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