The Reserve Bank is likely to keep the repo rate unchanged in its upcoming third bi-monthly monetary policy meet scheduled on Tuesday, said India Ratings and Research (Ind-Ra) in a note today. "The Reserve Bank (RBI) is likely to wait and watch on rates in its third bi-monthly credit policy meet in August. "There is room for RBI to cut rates by another 25 basis points (or 0.25 percent), however, a more appropriate time for a rate cut would be H2FY16," it said.
Amid evolving growth-inflation dynamics, Ind-Ra expects the policy stance to reflect RBI's continued intention to anchor both inflation and inflationary expectations. This has become even more important for RBI after its agreement with the government to follow a framework of inflation targeting, said the research agency. The Wholesale Price Index (WPI)-based inflation has remained negative for the last eight months and stood firm at negative 2.4 percent in June.
Consumer Price Index (CPI) inflation remains lower than RBI's target of 6 percent. Growth in headline CPI inflation accelerated to an eight-month high of 5.4 percent year-on-year in June compared with 5.01 percent in May, predominantly due to higher food inflation and diminishing base effect. The impact of unseasonal rains has also become visible, with a lagged impact on the prices of vegetables and is most pronounced in case of onion, said Ind-Ra.
Kharif sowing so far has been encouraging and the rainfall on all India basis till 29 July 2015 was only 3 percent lower from the long period average, it said. "Yet the risk to Kharif crops in view of India Meteorological Department's prediction of less than normal monsoon remains." Adding further, the agency said that base effect on inflation will also wane further in the coming months. For WPI, it will kick in from August and for CPI it will be more pronounced from September, putting pressure on inflation.
However, Ind-Ra still expects CPI inflation to remain in the comfort zone of RBI. "The central bank will also want to wait for cues from the US Federal Reserve on the timing of their interest rate hike," it said. The US Fed is likely to tighten policy for the first time in a decade this year, probably in September.
The agency said the key to defining the magnitude of rate cuts will depend on incoming data on CPI inflation compared to RBI's expectation of inflation trajectory. "Ind-Ra expects average the headline CPI inflation to come in at 5.4 percent in FY16, which we believe should create room for RBI to lower rates by a further 25bps (or 0.25 percent) during second half of 2015-16," it said.
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