New Delhi: The Reserve Bank of India (RBI) is likely to maintain a status-quo on interest rates in the second bi-monthly monetary policy review on 7 June 2016, says India Ratings and Research (Ind-Ra) in a press release. The RBI is likely to focus on inflation control, liquidity management and the pending policy transmission in the near-term.
The central bank cut policy rates by 25bp in the first bi-monthly policy review for FY17 on 5 April 2016 and narrowed the policy rate corridor to 50bp from 100bp, by reducing the marginal standing facility rate by 75bp and increasing the reverse repo rate by 25bp. This, according to the RBI, was done to ensure better alignment of the weighted average call rate with the repo rate.
Since the last review, call money rates have remained closer to the repo rate and liquidity conditions have been largely comfortable. The major reason for comfortable liquidity has been i) significant decline in the government’s surplus cash with RBI, it declined to INR36.47bn on 2 June 2016 from INR809.82bn on 5 April 2016 and ii) open market operations by RBI (INR700.14bn). In the past policy meeting, the central bank tried to address two key issues – tight liquidity and weak monetary transmission. While the liquidity deficit has remained within the comfort zone of the RBI, the money transmission hasn’t shown improvement.
A few other factors important for the RBI’s monetary policy stance are: Fed’s rate decision later in the month, Brexit and the performance of monsoons. On all these counts, it is unlikely that any event will be disruptive for the global/Indian financial markets. However, concerns with respect to food inflation are unlikely to go away, despite the prediction of an above normal monsoon. A case in point is the sudden spike in prices of potatoes. The consumer price index inflation for April came in on the higher side at 5.4% and the wholesale price index moved into the positive territory after 17 consecutive months of negative growth, both driven by food prices.
Globally the uptick in brent crude prices and domestically higher minimum support prices will also push up headline inflation. Prices of global crude oil have risen from the level of under USD40/barrel in March 2016 to levels of around USD50/barrel, raising concerns about a cascading implication on inflation.
Ind-Ra expects that though there is a room for the RBI to cut rates by another 25bp in FY17, it is unlikely to happen in this policy meeting.
