ICRA has said that RBI is unlikely to cut policy rates in its upcoming monetary policy review on August 9, but a 0.25 per cent cut is on cards in 2016.
It said the central bank is expected to keep rates unchanged for now as CPI inflation at around 5.8 per cent in June is close to upper end of RBI’s target of 4 per cent (+/— 2 per cent).
“Regardless of the imminent appointment of the Monetary Policy Committee (MPC) that would determine the policy rate required to achieve the inflation target going forward, and the appointment of a new RBI Governor, we expect lower CPI inflation in H2 FY2017 to create space for additional monetary easing of only 25 bps in 2016, if the prevailing inflation targeting framework continues unaltered,” said Aditi Nayar, Senior Economist, ICRA.
The August 9 policy would be the last by present RBI Governor whose term ends on September 4.
After that the policy rates are likely to be determined by MPC based on inflation targets notified by the government.
ICRA expects the Reserve Bank to leave the repo rate unchanged in the August 2016 policy review, the agency said.
Nayar further said with economic growth expected to pick up sharper rate cuts may not be needed.
ICRA further said increasing the upper limit of the CPI inflation target above 6 per cent may also not be appropriate.
“The higher the tolerance for inflation at the retail level, the higher the interest rates that savers would demand to remain invested in financial savings, which would ultimately impair the appetite for borrowing,” ICRA said.
Given the substantive changes related to the MPC that are already on the anvil, ICRA cautions against any major change in the inflation target, despite the shortcomings of CPI inflation, the statement added.
“Going forward, development of a credible, high frequency indicator of growth in both industry and services, may offer a surrogate for comprehensive data on unemployment in India,” it said.
This may allow RBI to eventually adopt a dual objective in place of the current framework of flexible inflation targeting, ICRA added.
