Bankers do not expect any change in Reserve Bank of India's (RBI) key repo rate of 8% in its bi-monthly monetary policy review on August 5 as inflation continues to remain sticky on account of food scarcity following sub-optimal monsoon.
With wholesale and consumer price indices showing signs of easing at 5.43% and 7.31%, respectively in June from 6.01% and 8.28% in the previous month, there is some ground for a downward move in interest rates but not before the trend is confirmed, say bankers.
The base effect has also aided the narrowing of inflation.
Bankers are of the view that the central bank governor Raghuram Rajan may remain cautious on the rate front even though growth emphasis of the new government warrants softer rates.
According to India Ratings & Research, any move towards rate cuts could trigger a rupee depreciation, affecting the coverage metrics of net importers. It said in a statement that there have been instances where rate cuts in the past were followed by 1.1%-5.8% depreciation in the rupee.
In the last four instances of a repo rate cut since March 2010, the rupee fell on three occasions one month post the effective date of the rate change. The average and median rupee depreciation in these three instances was 4.1% and 5.2%, respectively.
However, the RBI has always maintained that addressing inflation was its first priority over growth. "With the monsoon picking up in the last one week, prices of vegetables are showing signs of easing," said K Harihar, treasurer at FirstRand Bank.
But the monsoon remains deficient.
"Cumulative monsoon deficiency of 24% has led to a build-up of food price pressure," YES Bank said in a statement.
Factors like stable currency, restrained minimum support price hikes, ongoing fiscal consolidation along with improvement in quality of government expenditure are likely to have a gradual disinflationary impact going forward, YES Bank said.
The bank expects enhancement of the term repo window and a relaxation in daily cash reserve requirements (CRR) to 90% from 95%, besides a 50 basis point cut in statutory liquidity ratio (SLR) from 22.5%.
SLR is the mandatory requirement for banks to invest in government securities as a percentage over their net deposits.
According to most bankers, the RBI may not be in a hurry to lower rates as saving rate has been stagnant. Any easing of rates would hamper the rate of savings.
"One could expect a rate cut sometime next calendar year," Harihar said.
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