Markets expect the policy rates to be unchanged when the Reserve Bank of India (RBI) Governor reviews the monetary policy on Tuesday. “The repo rate, reverse repo rate and Marginal Standing Facility (MSF) would be unchanged,” said N. S. Venkatesh, Chief General Manager and Head-Treasury, IDBI Bank.
Repo rate is the rate at which banks borrow funds from the central bank. Reverse repo rate is the rate at which banks park their surplus funds with the central bank and MSF is the rate at which banks could borrow funds during acute shortage of liquidity at a higher rate.
While reverse repo rate is 100 basis points or one percentage point below the repo rate, the rate for MSF would be 100 basis points or one percentage point above the repo rate.Moderation in CPI
“With inflation easing in December 2013 and consumer demand remaining weak, despite the up-tick in the farm sector, the RBI will retain the repo rate in the third quarter review of monetary policy,” said Naresh Takkar, Managing Director & CEO, ICRA. Achieving the targeted moderation in consumer price index (CPI) to 8 per cent over the next 12 months, as recommended in the recent report on the monetary policy framework, may be feasible if the monsoon in 2014 is favourable and there are no supply shocks for food items or other commodities. However, said Mr. Takkar, “based on the expected trajectory of the CPI, the commencement of a rate easing cycle appears distant.” However, Mr. Venkatesh feels that “the outlook for the inflation (wholesale price index) will be at 7 per cent and the growth (gross domestic product) numbers will be maintained at 5 per cent in the policy review.”Inflation
“On the inflation front, concerns remain,” stated a report published by HSBC Global Research. “Headline WPI and CPI inflation fell notably in December led by food inflation as supplies of fruits and vegetables improved. However, core inflation readings ticked up slightly and core CPI inflation remains uncomfortably high at more than 8 per cent.”
In its last monetary policy statement, the RBI said that it would raise the policy rate if headline inflation did not decline significantly, or if core inflation did not fall. “While the first condition was not met, the latter was.” If the RBI were to strictly adhere to its forward guidance it would hike rates on January 28. However, “we believe it will remain on hold, hanging its hat on the decline in headline inflation and the weakening growth momentum. But, it is going to be another close call,” HSBC added.
It is expected that the RBI Governor will explain about the Urjit Patel Committee report on monetary policy framework and the rationale of the committee for fixing the CPI numbers as nominal anchor rate. Going forward, HSBC’s Leif Eskesen believes core inflation will remain sticky around current elevated levels and likely to compel the RBI to tighten further. If the government approves the proposal to introduce an inflation-targeting framework, it could help pave the way for further rate hikes.