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RBI's Raghuram Rajan to announce monetary policy; a complete wrap-up

The Reserve Bank of India is slated to hold its third bi-monthly policy meet today. This time, after three rate cuts in calendar year 2015, the central bank is expected to keep key rates unchanged on the basis of the current domestic economic scenario. 

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RBI Governor Raghuram Rajan
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The Reserve Bank of India is slated to hold its third bi-monthly policy meet today. This time, after three rate cuts in calendar year 2015, the central bank is expected to keep key rates unchanged on the basis of the current domestic economic scenario. 

Since the last rate cut, retail inflation has shot up to an eight month high, monsoon has been subdued, and the 75 bps cumulative rate cut by RBI this year, has translated into a less than 25 bps cut in the lending rates by banks so far.

Having said that, there's a mix opinion in the market – most experts, including bankers and brokerages don't expect a policy cut -- while India Inc and the government are rooting for a rate cut to give a push to the economy. 

No rate cut

Brokerages

Most brokerages have maintained that RBI will keep rates unchanged as the Consumer Price Index (inflationary gauge that RBI tracks to decide its stance) is at an eight-month high, and monsoon has been in deficit so far, despite a late revival in rains. 

India Ratings, Morgan Stanley, Bank of America - Merrill Lynch and HSBC have said that the RBI is likely to stay on "hold" at the policy review meet, but did not rule out the possibility of more rate cuts in the coming months. 

While, Moody's Ratings, ICRA and Assocham expect a 25 bps rate cut.

Here's what they said about the policy meet:

India Ratings

The Reserve Bank of India (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 bps; however, a more appropriate time for a rate cut would be H2 FY16. 

Amid evolving growth-inflation dynamics, Ind-Ra expects the policy stance to reflect RBI’s continued intention to anchor both inflation and inflationary expectations. 

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. Kharif sowing so far has been encouraging and the rainfall on all India basis till July 29 was only 3% lower from the long period average. 

The central bank will also want to wait for cues from the US Federal Reserve on the timing of their interest rate hike. US Fed is likely to tighten policy for the first time in a decade this year, probably in September.

Morgan Stanley

The Reserve Bank is likely to keep interest rates on hold in the next month's monetary policy meet, but may slash the key lending rate by a 50-75 basis points by March 2016.

The investment firm cited acceleration in June headline CPI inflation and increase in core CPI for the third consecutive month, for its stance. 

"We believe the RBI is likely to wait and watch how the monsoon season pans out and keep rates on hold in the August monetary policy meeting."

Bank of America Merrill Lynch also said that RBI will keep rates unchanged, and expected the bank to cut rates in early 2016 by 50 bps.  

"We continue to expect the RBI to pause on Tuesday, on poor rains and cut 50 basis points in early 2016. However, we expect Governor Raghuram Rajan to strike a dovish note to keep the door open for further rate cuts if inflation continues to be in control," the report added. 

“Rains are critical in sowing months of July-August and the ongoing dry spell in central and western India, which grows oilseeds, pulses and raw cotton is worrisome, adding that poor rains pose a temporary 250 basis points inflation risk.

DBS cited that a firm US dollar against the Indian rupee, and the US Federal Reserve's interest rate decision will decide RBI's policy stance. 

“Apart from the firmer US dollar, signals from the US Federal Bank will also be important for the Reserve Bank of India's rate trajectory. If the official commentary signals a start to the US rate hiking cycle later this year, it will affirm our expectations that the RBI will maintain a prolonged pause on the rates front." 

Bankers

Bankers also held a mixed view; while some said that RBI will not cut rates any further, others were were of the view that there was still scope for a rate cut, but whether it will happen in the third bi-monthly policy or not was unclear. 

"I am not expecting any rate cut," SBI Chairperson Arundhati Bhattacharya said. 

Bank of Baroda managing director and CEO Ranjan Dhawan said, “It would be a status quo. I don't think there has been much change in the macroeconomic conditions from the last policy. RBI is closely monitoring monsoon. Nothing indicates that it is a good or a bad monsoon."

HDFC Bank Deputy Managing Director Paresh Sukthankar said: "... It is difficult to hazard a guess on what move the

RBI would be taking on Tuesday, but interest rates are on a downward trend. I expect RBI to cut rates by 25-50 basis points this fiscal." 

HSBC India Country Head Naina Lal Kidwai said: "We are expecting 0.25% reduction and 0.5% by the end of the year. If reduction has to be done, why not do it early? This will benefit industry and boost growth." 

Rate cut

Moody's Analytics and ICRA, however, held a contrarian view, and maintained that RBI needed to cut rates on August 4 as inflation fears haven't subsided.  

The analytics arm of the ratings agency said: RBI will cut key lending rates on August 4. The central bank will lower rates by 0.25% “as inflation is likely to remain subdued on the back of average rainfall and lower commodity prices.

"The Reserve Bank of India could deliver fireworks in its monetary policy meeting on Tuesday by cutting the repo rate by 25 basis points to 7%," it said in a report, 'Asia Spotlight: More Rate Cuts in India'. 

"There have been double-digit increases in areas sown compared with the last year for major kharif crops. And although the monsoon season is not over yet, we believe RBI has an opportunity to stay ahead of the curve and cut rates because better food supply will likely cap inflation."

Moody's also said that private investments have not picked up as the economic engine is yet to fully fire without key reforms. Besides, production momentum is weak, auto sales are low, and a secular upward trend in credit growth remains elusive. 

"But we believe that favourable supply-side developments in recent weeks prescribe another rate cut in August," it added. 

Ratings Agency ICRA, in a report dated July 25, said, concerns on inflation are ebbing and the Reserve Bank should slash the key rates at the forth coming policy meet for better transmission of its moves by lenders. 

"Consumer price inflation seems likely to undershoot the central bank's projection of 6% in January next, brightening the prospects of a repo rate cut of 0.25% during the ongoing quarter, provided that food prices remain in check," ICRA managing director Naresh Takkar said. 

He said an early cut "may be warranted" as tighter liquidity conditions after the onset of the busy season would impede the process of transmission to bank lending rates. 

The CPI inflation which rose surprisingly to 5.40% in June will trend under 5% for July and August, he added. 

India Inc

Assocham General Secretary D S Rawat said, factors like modest rise in minimum support price (MSP) for various crops, together with benign global commodity prices and others, are likely to result in moderating Consumer Price Index (CPI) at 5.2-5.4% in second half, thereby undershooting the apex bank's earlier projection of 6% in January 2016, said Assocham General Secretary D.S. Rawat.

"As such a shift in the monetary policy stance by the RBI towards a softer interest rate regime by delivering a repo rate cut of 25 bps would help spur investment, consumption demand and overall growth, said Rawat. 

India Inc is pitching for a rate cut because of low wholesale inflation and slowdown in industrial growth. 

Even the government has resorted to underplaying inflationary concerns despite CPI being at an eight month high, and have said that it wants the benchmark rate to be cut to prop up growth. 

A top Finance Ministry official has said the central bank should not hesitate in cutting interest rate just on inflationary concerns. The government, he said was keen on brining down cost of borrowing, and RBI cutting its key policy rate will be a trigger for such a move that will boost investment and growth. 

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