The Reserve Bank of India is unlikely to cut rates in its forthcoming monetary policy on April 1 even though economic conditions seem to have eased recently with some moderation in inflation and financial market stability, thanks to the election euphoria.
“I expect the RBI to keep interest rates on hold in the upcoming monetary policy as wholesale price index and consumer price index (CPI) inflation have come down sharply, and the RBI’s target of 8 per cent CPI inflation by January 2015 looks feasible. I believe that it would be premature to cut interest rates though as inflation is down but not out as yet,” said D. K. Joshi, Chief Economist, Crisil.
“We believe that the RBI will ensure higher real interest rates till such time that domestic macro-economic adjustments are attained and, hence, I expect the RBI to maintain status quo in the upcoming policy announcement,” said Dhananjay Sinha, Head-Institutional Research, Economist and Strategist, Emkay Global Financial Services.
CPI inflationCPI inflation eased to a 25-month low of 8.1 per cent in February.The rupee has appreciated sharply and the equity market has rebounded on the back of FII inflows. Besides, contractions in current account and fiscal deficits are indicating some comfort. But will this be enough for the RBI to start monetary easing rates? “In my view”, said Mr. Sinha, “while economic indicators provide some comfort, it will be too early for it to reverse gear on policy rates.”
Further, core CPI has remained sticky at 7.9-8.1 per cent since November 2013, reflecting the high wage inflation as well as inclusion of several services in this basket. To an extent, the non-tradable nature of some services afford higher pricing power to producers, enabling a greater pass through of input price pressures to final prices, even when domestic demand is subdued. As a result, core CPI is likely to remain at elevated levels in the near-term.
“While consumer inflation is now close to the target of 8 per cent for the end of 2014 suggested by the Urjit Patel Committee, monetary easing is unlikely in the upcoming policy review,” said Aditi Nayar, Senior Economist, ICRA (an associate of Moody’s Investors Service).
Said Ms. Nayar, “With the clearer picture on the magnitude, temporal dispersion and geographic spread of rainfall as well as its impact on sowing of various crops likely to emerge only by July-August, a monetary policy response is unlikely in the intervening period.”
