MPC meet: RBI may opt for status quo on rates tomorrow

Urjit Patel

Retail inflation, based on Consumer Price Index (CPI), dropped to multi-year low at 2.99 per cent in April over last year, mainly due to lower cost of food items, including pulses and vegetables.

According to India Inc, the time is opportune for the Reserve Bank to cut interest rates as inflation is likely to remain at moderate levels.

"...growth and investment need to improve". These are indicators which are available. "Any Finance Minister under these circumstances would like a rate cut", Jaitley told CNBC TV18.

While holding its repo, or short term lending rate, at 6.25 per cent at its previous policy review in April, the RBI had said "the decision of the monetary policy committee (MPC) is consistent with a neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth".

Rating agency CARE expects status quo in the policy stance of RBI which will announce its second bi-monthly monetary policy review for this fiscal year tomorrow. However, a section of economists says that a rate cut is likely in the August policy.

State Bank of India (SBI) said, "A widening of the corridor or a signal on the SDF will be a well thought and pragmatic move to push the yields down and ensure monetary policy transmission against the backdrop of significant liquidity overhang in the system".

Finance Minister Arun Jaitley had said inflation has been under control for long and is likely to remain so on the back of good monsoon and unlikely spike in oil prices.

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BofAML expects the RBI MPC to look through any inflationary/ deflationary impact of GST rates as a one-off adjustment. Bank of America Merrill Lynch (BofAML) expects May CPI inflation at about 2.5 per cent, with daily data showing food prices continuing to fall even in June on a good summer rabi harvest.

"There is a likelihood that the official CPI and GVA inflation projections have revised down on 7 June, producing room for policy guidance to soften", said Radhika Rao, India Economist, DBS.

In its outlook going ahead, the central bank had highlighted the inflation risks, including from the monsoon uncertainties posed by El Nino, increased allowances related to the pay commission, one-off impact of the Goods and Services Tax (GST) implementation and global reflation risks.

However, as consumer price index-based inflation dropped below 3% in April (aided by food prices not rising as expected and with worldwide crude oil prices staying benign), economists said inflation will trend far below the central bank's projected trajectory.

The Reserve Bank of India kept its repo rate unchanged at 6.25 percent for a third consecutive policy meeting on Thursday as it continues to.

Echoing the view, ICRA said RBI is unlikely to cut rates at its policy review next week but the tone of the statement will be less hawkish than the previous one.