St veers towards a pause after 3 cuts on the trot

High retail inflation and a weak rupee could keep the central bank from announcing the fourth consecutive rate cut since January this year, goes the median expectation in a dna poll.

Nine out of 15 economists and bankers polled expect the Reserve Bank of India (RBI) to maintain status quo in its mid-quarter monetary policy review today.

Of the rest, four expect the RBI to cut the repo rate – or the rate at which it lends to banks – by 25 basis points (bps) to 7%, while two expect it to keep the policy rate unchanged and instead cut the cash reserve ratio (CRR), or the proportion of their total deposits that banks are required to park with the central bank, by 25 bps from 4% now.

While headline inflation, as measured by the wholesale price index (WPI), continues to moderate, retail inflation, measured by the consumer price index (CPI), is not showing significant signs of easing. For May, the WPI eased to 4.7% from 4.9% a month ago, while the CPI remained sticky at 9.3% compared with 9.4% in April.

“With the RBI intending to sustain the WPI inflation at 5% by the end of this fiscal even as the rupee slides, the central bank may have to pause further cuts in the repo rate,” Crisil said in a note.

The central bank has cut the repo rate by 75 bps in the three policy reviews since the start of this calendar, citing a favourable fall in the WPI inflation.

However, this time, a sudden fall and high volatility in the rupee-dollar exchange rate have made things complicated for the central bank as they pose an inflation threat going forward.

Last week, the rupee fell to a record low of 58.98 to the dollar, but closed the week at 57.53 after the RBI’s intervention in the forex market. The local currency lost 0.8% against the greenback over the week.

On the other hand, growth continues to remain tepid. The index of industrial production was up 2.3% in April as compared to same month the previous fiscal.

“The RBI might not immediately want to signal a pause in the monetary easing cycle as a sudden stoppage can have adverse implications for domestic money-market rates and push back chances of growth recovery,” economists Suvodeep Rakshit, Indranil Pan and Madhavi Arora of Kotak Mahindra Bank said in a note. They expect the RBI to cut policy rates by 25 bps on June 17.

But cutting policy rates may not serve the purpose as banks have held on to lending rates despite three successive policy rate cuts from the central bank.

Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, expects the RBI to cut CRR instead and use open market operations to bring down the lending rates. “It is only when bank liquidity improves that lending rates will come off,” he said.

As per latest data, as on May 31, deposit growth at 13.4% was trailing loan demand at 14.3%.