\’RBI to hold rates on Tuesday; cut likely in September\’

Friday, 31 July 2015 – 2:44pm IST | Place: New Delhi: Reserve Bank is likely to pause on rates at its ensuing meeting next week, but may go for a rate cut by the end of the year, as further clarity on the monsoon front is awaited, say leading brokerages.

Bank of America Merrill Lynch and HSBC in two separate reports today said that the RBI is likely to stay on “hold” at the policy review meet next week, but there is possibility of more rate cuts in the coming months.

According to BofA-ML, RBI will maintain a dovish note to reiterate that the door is open for further rate cuts to support growth.

“We continue to expect the RBI to cut rates another 50bp with inflation well set on its ‘under-6%’ January 2016 target,” BofA-ML said in a research note. It expects RBI to cut another 25 basis points in September and a final rate cut on February 2.

As per HSBC, if rains remain non-disruptive and the RBI’s 6% inflation target for January 2016 is within reach, “space for a final 25 bps could open up, but not more than that… ,” it said adding that “we believe a fresh round of rate cuts beyond 2015 looks unlikely”.

As per official figures, retail inflation rose to an eight-month high of 5.4% in June on costlier food items, fuel, housing, clothing and footwear even as prices of sugar and confectionery items eased during the month.

RBI, in its last policy review on June 2, had cut the repo rate by 0.25% for the third time this year to spur investment and growth, but hinted that there may not be any more cuts in the near term.

RBI cut the repo rate (short-term lending rate) from 7.5% to 7.25 in June, but left all other policy tools such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged at 4% and 21.5%, respectively.