RBI likely to hold repo rate in policy review

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Urijit Patel panel focused on core inflation

RBI likely to hold repo rate in policy review
The Reserve Bank of India (RBI) may hold rates when it unveils its first bimonthly credit policy on April 1, according to bankers and economists. The central bank, they said, may pause to assess the impact of the rate hikes that have been inflicted in the past few months before going ahead with more.

The wholesale price inflation (WPI) moderated to a better than expected 4.7 per cent in February from 5 per cent in January but the core inflation rose to 3.1 per cent from 3 per cent. Food price inflation eased to 5.6 per cent year-on-year from 6.2 per cent.

Saugata Bhattacharya, an economist with Axis Bank said, “RBI may increase the repo rate by another 25 basis points to fight inflation. Core inflation is on the rise as companies have started passing on the price increases, which is a concern for RBI. It will have a delicate balancing act to undertake as there is some room available to hold rates as well.”

RBI is following the Urijit Patel committee recommendations of targeting inflation as CPI (consumer price index), it believes, impacts the lives of the common man and the economy.

In the wholesale price inflation (WPI) only 25 per cent consideration is given to food while in the consumer price inflation about 50 per cent consideration is given to food.

NS Venkatesh head of treasury IDBI Bank, “Though any abrupt rise in interest rates may not be the way forward for the RBI but it aims to reduce inflation over a reasonable period of time. RBI has already hiked rates and now it may pause to assess the impact of the rate hikes.”

Interest rates in the system are already high, with banks charging over 200 basis points over their base rate even to prime customers which works out to 12.5 per cent, excluding for home loans which are priced about 25-50 basis points higher than the base rate.

Ashutosh Khajuris, president, treasury at Federal Bank said, “ The inflation is coming under control and the base numbers are very comfortable, which may give the RBI some room to hold rates.”

With the elections around the corner, there is an expectation that inflation could rise due to large spending by the political parties. El Nino, a rare weather condition which occurs at irregular intervals of 2-7 years, weakens the Asian monsoon, often causing drought in north-west and central India. If monsoons are delayed or below par, there will be a rise in CPI.

Upasna Bhardwaj, ecnonomist with ING Vysya Bank said in a release, “While the recent moderation in prices has provided quite a respite, we do not expect the trend to continue given the upside risks on food inflation that have recently surfaced on account of untimely rains in various parts of the country coupled with the threat of the El Nino phenomenon. Also, core inflation continues to remain sticky and elevated. Being cognizant of these factors, along with the risk of fiscal excesses post elections, we expect RBI to at best maintain a status quo in the upcoming meeting, providing a fairly balanced future guidance”.

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