Cautious ahead of the US Fed meeting, RBI is likely to keep its monetary policy steady on Tuesday amid lingering concerns over inflation, after having already cut the repo rate by a sharper 50 basis points at its last meet.
Inflation based on the consumer price index rose to 5% in October, from 4.41% in September, mainly on the back of rising food prices.
Analysts are of the view that the Reserve Bank of India is likely to wait for the Budget announcement before proceeding further. The two key events the central bank is watching are the upcoming Fed event and the impact of the 7th Pay Commission recommendations
There is a possibility that interest rates in the US might eventually go up for the first time since the global economic crisis of 2008. Federal Reserve rate-setters are meeting on December 15-16 to take a call on this.
Even bankers feel that given the current macro-economic scenario, Governor Raghuram Rajan in all probability will go for a status quo. The central bank is also mindful of the inflationary impact of a falling rupee, which has already hit a two-year low against the dollar recently.
The bankers argue that Rajan has already “front-loaded” rate reductions and is now keen on policy transmission of a his cumulative 125 bps cut so far this year by the lenders.
“I think Rajan will wait for the Fed move. He will not change the rates,” UCO Bank Managing Director and Chief Executive R K Takkar said.
Moreover, analysts at American brokerages Citi and Bank of America Merrill Lynch also ruled out any surprise this time.
“We expect Rajan to pause on Tuesday, given the 50 bps surprise cut last time. He should cut a final 25 basis points in February,” BofA-ML said in a research note.
Citi also echoed similar views saying “following the 50 bps front-loading in September, RBI will maintain status quo on Tuesday as significant uncertainty exists ahead of December Fed and the upcoming Budget.”
Trade body Assocham also expects the apex bank to keep the benchmark rate unchanged, with the Middle East already in turmoil after Turkey shot down a fighter jet of Russia.
“Fast changing geo-political situation in the Middle East and the increased terror threat with consequent economic costs will surely weigh on the RBI’s policy stance which is not expected to give any more cut in the interest rates in the upcoming review,” it noted.
In the last policy, RBI saw inflation reaching 5.8% by January 2016, under its goal of 6%.