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RBI to review monetary policy with possibilty of holding monetary policy rates

Friday, 17 January 2014 - 6:31pm IST | Agency: Zee Research Group
On January 28, the Reserve Bank of India (RBI) will release the third quarter review of monetary policy for the fiscal 2013-14 and the experts seem to be in unanimity with regard to the possibility of RBI holding monetary policy rates.

On January 28, the Reserve Bank of India (RBI) will release the third quarter review of monetary policy for the fiscal 2013-14 and the experts seem to be in unanimity with regard to the possibility of RBI holding monetary policy rates.

Raghuram Rajan will be presenting the fourth credit policy since he took over as the governor of the RBI in September 2013. In his first two policies, he has raised the repo rate twice each by 25 basis points (1 basis points is equivalent to 0.01%). However, in the third policy he kept policy rates unchanged. The current repo rate stands at 7.75%.

Latest data points suggest that RBI would keep policy rates steady while announcing the monetary policy on January 28.

The wholesale price index (WPI) inflation stood to its five months low at 6.16%in December 2013. While the inflation was 7.52% in November 2013, it stood at 7.31% in the corresponding month last year (December 2012). But, still inflation is above the comfort zone of RBI (around 5 per cent).

Likewise, owing to the lower food prices, the consumer price index (CPI) inflation declined to 9.87% in December when compared to a figure of 11.16% in November 2013. The food inflation fell sharply to 13.7% from 19.9% in November 2013. Although the retail inflation (measured by CPI) has eased a bit yet it is still hovering near the double digit mark.

However, there are factors which might push RBI to cut policy rates. The Index of industrial production (IIP) figure for the month of November witnessed de-growth of 2.1% and the most worrying factor is significant slowdown in the manufacturing sector. Further, economic growth rate hit 11-year low of 4.8% in the second quarter of current fiscal (Q2FY14).

Rejecting the above hypothesis that RBI may contemplate a rate cut in the upcoming policy, Brinda Jagirdar, consulting economist (former chief economist at SBI), said, “RBI will hold the policy rates during the January review. Going forward, RBI may cut rates if inflation comes down on sustained basis.”

The government needs to take measures in order to revive the growth rate. “Perhaps when the new government comes at the centre they will try to initiate policy actions. In such a scenario, if RBI reduces policy rates then it would be in sync with the government initiatives,” she added.

Even, a report released by Bank of America Merrill Lynch (foreign brokerage firm) affirmed that RBI is likely to hold rates in its next policy meet on January 28. The report stated that the July tightening measures have pushed recovery beyond June 2014.

Likewise, Sudip Bandyopadhyay, President, Destimoney Securities, asserted, “RBI will maintain status quo on January 28 policy review.”

Similarly, a report from a leading domestic brokerage firm, Angel Broking, acknowledged, “In view of continuing sluggishness in growth and with food inflation expected to moderate and bring some respite from elevated headline WPI and CPI inflation prints, we expect the RBI to hold monetary policy rates during its January 28 policy review.”


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