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Analysts see Raghuram Rajan holding rates on December 2

November 27, 2014 05:35 pm | Updated November 16, 2021 07:12 pm IST - Mumbai

RBI Governor Raghuram Rajan. File photo: Mohammed Yousuf

RBI Governor Raghuram Rajan. File photo: Mohammed Yousuf

The Reserve Bank is likely to keep key policy rates unchanged in the upcoming monetary policy review next week and may cut rate only next year, analysts at ratings agencies and brokerages said on Thursday.

Governor Raghuram Rajan will unveil the fifth bi-monthly monetary policy review on December 2.

“We believe that RBI is likely to keep policy rates on hold on December 2. We assign a very low probability to a rate cut in that meeting,” Morgan Stanley said in a report.

Domestic rating agency Care Ratings too concurred the view, saying Mr. Rajan will go for a status quo on rates at next week’s policy review, even though inflation is trending down.

“While a rate cut would help to assuage sentiment, the RBI may choose to defer the decision for the next review,” Care said in a note.

Morgan Stanley said the key thing to be watched in the policy would be the central bank’s language regarding its comfort about achieving its inflation target according to its pre-guided glide path, and in turn, the implications of timing of the first rate cut.

The Reserve Bank has set a glide path of retail inflation or CPI at 8 per cent by January 2015 and 6 per cent by January 2016.

The consumer price inflation is on downward trajectory largely due to base effects and the RBI will see through it.

The CPI inflation cooled to 5.52 per cent for October, a multi-year low considering that it had been hovering at the double-digit mark for a long time. The RBI is targeting to get the CPI at 8 per cent by next January and down to 6 per cent by January 2016.

With inflation coming down, calls for a rate cut have been growing stronger. Those pitching for a rate cut include corporate chieftains as well as Finance Minister Arun Jaitley, who wants to deliver results on growth.

Care Ratings said the decline in inflation for five consecutive months “poses a strong case” for a rate cut, but reiterated that this is due to the base effect.

Factors like Agriculture Ministry’s forecast of a lower kharif crop output due to poor monsoon will put a pressure on inflation, Care said. The average CPI inflation this fiscal, from April to October, stands at high of 7.4 per cent.

Apart from these two factors, depreciation in the rupee driven largely by changes in dollar-euro combination is also something which the RBI will be looking at, it said.

In the last 15 months that he has been at the helm at RBI, Mr. Rajan has hiked rates thrice citing inflation and has repeatedly flagged price rise as a major concern.

The Morgan Stanley report says, “We think the first rate cut is likely to be in the February monetary policy meeting or at the latest by April 2015.”

During 2015, the report sees 50 basis points rate cut.

The American brokerage expects CPI inflation to dip to around 4.5 per cent in November 2014 before edging up to around 6.4 per cent in the first quarter of 2015 as the favourable base effect recedes.

“After Q1 of 2015, we expect CPI inflation to decelerate to 6 per cent by April 2015 on a sustainable basis, earlier than the RBI’s expectation of reaching the 6 per cent mark by January 2016 and consensus outlook for Jan-Mar 2016,” the report said.

It said factors such as moderation in rural wage growth closer to nominal GDP growth, reduction in fiscal deficit, lower commodity prices, positive real deposit rates and moderation in housing costs would lead to deceleration in CPI inflation.

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