May Inflation eases: What will be RBI's move on July 31?

Inflation declined to 7.25% in June as prices of manufactured items eased a little, although vegetables, wheat and pulses became costlier. Inflation, as measured by the Wholesale Price Index (WPI), was 7.55% in May.

So, what will be RBI's move on July 31?

Economists do not feel that the fall in inflation guarantees a rate cut by the Reserve Bank of India on July 31. Gaurav Kapur of Royal Bank of Scotland says that probability of rate cut in the July policy is still on the lower side unless oil prices drop fairly sharply in the next couple of days.

"In the last policy, the RBI hinted looking at CPI inflation and the other important aspect of monetary policy is that it is looking complimentarity from the fiscal side. Therefore, unless WPI reaches below 7%, inflation isn’t at a comfort level yet," he said in an interview to CNBC-TV18.

Agrees Arun Kaul, Chairman, UCO Bank that if monsoon does not improve that could lead to higher inflation expectations and there is a possibility that RBI may not take any step.

However, Kaul also feels that during rainy season some of the food articles as vegetable prices tend to go up, which is pressurising food articles. "We must not ignore the high base effect and the benefit that we will get in the next couple of weeks’ time. So possibly the inflation could soften provided currency remains okay and crude doesn’t become very expensive," he adds.

Echoing similar sentiments, Aditi Nayar, Economist, ICRA Limited says that the central bank is unlikely to cut rates in its credit policy review. At the same time, she also points out that monsoon is going to be issue that the RBI is likely to focus on this time. 

"The sowing trends could catch up and reach close to normal but if that doesn’t happen then pricing pressures are definitely going to be something that are going to start to harden inflationary expectation across the board. Higher food prices definitely mean that consumer inflation will remain fairly strong. I think based on the last guidance from the RBI, they are definitely going to be taking that into account," she elaborates.

Bond markets

The ten year yield has been trading in the 8-8.20 range and with lower inflation it might test 8% once, says Agam Gupta of Standard Chartered Bank. :But I do not see it sustaining below that without any rate cuts in the near future. So I think its going to remain rangy. It could just take a peak below 8% but I do not think it will sustain there without any rate cuts," he reiterates.

Gupta elaborates that of RBI's dividend is likely to come to the government in August. Hence, the liquidity side the situation will remain reasonably comfortable and open market operation (OMO) is unlikely.

He explains, "At the moment the liquidity situation is reasonably comfortable. The core deficit is around 55,000 crore which is within RBI’s stated band of comfort. Going forward there is redemption of 15,000 crore in the near future."

Nasrin Sultana

nasrin.sultana@network18online.com