RBI likely to keep interest rate unchanged tomorrow

The Reserve Bank may maintain the status quo on interest rate in its bi-monthly monetary policy review to be unveiled tomorrow amid apprehensions that deficient rainfall may further push up food inflation.

The food inflation remaining over 8 per cent mark will weigh heavily on the RBI, which has been maintaining that containing inflation is its top priority.

Prices of some of the food articles like tomato, onion, potatoes are still quite above normal. With monsoon being below normal, there is a fear that price situation, especially food inflation, may further deteriorate in the coming days. Monsoon deficiency stood at 23 per cent in at the end of July.

State Bank of India (SBI) Chairperson Arundhati Bhattacharya said the RBI is likely to keep interest rate intact in the monetary policy review. "I think status quo (in policy rate) is more likely," she said.

However, there are expectations that there could be some announcement in term of liquidity enhancement.

"There may not be any action on interest rate front but there could be some action which will induce additional liquidity into the system," Oriental Bank of Commerce Chairman and Managing Director S L Bansal said.

HDFC Bank Deputy Managing Director Paresh Sukthankar said: "Our view is that policy rates are likely to remain roughly stable."

He further said: At least, the assumption that we are built in to for the GDP growth in this year, we are counting on major tail winds from interest rate reduction. The pick-up in the economy that we are anticipating is really going to be driven more by the policy environment and the investments picking up but not necessarily on the back of lower interest rates."

According to Indian Overseas Bank, interest rates will remain same in this policy, but going forward there would be a downward bias.

In the last policy review in June, RBI chose not to tinker with the policy rate. It was the second consecutive time that RBI Governor Raghuram Rajan kept interest rates unchanged.

The repo rate, at which the RBI lends to banks, was retained at 8 per cent and the cash reserve ratio (CRR) was kept unchanged at 4 per cent.

The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must park at the RBI, was cut by 0.5 per cent to 22.5 per cent of their net demand and time liabilities (NDTL) with effect from June 14.

Bank of America-Merill Lynch said it expects the rate cut to happen only in December, if the monsoon normalises to cool down inflation, or early 2015 in case prices rise prolongs.

"We continue to expect the Governor to be on hold on August 5...the RBI will be on long hold till it is clear that inflation is truly coming off," it said.

"The RBI is likely to leave rates unchanged despite easing inflation... no hurry to ease rates," DBS said. It said the macroeconomic backdrop is looking better on most counts since the last monetary policy review in June and specifically mentioned a stability in the industrial growth saying it is only expected to consolidate over the next few quarters.

However, the industry is pitching for a rate cut to boost industrial activities. Exhibiting signs of revival, India's manufacturing activity, gauged by the Index of Industrial Production (IIP), had risen to 19-month high of 4.7 per cent in May on account of improved output from mining, power and capital goods sector.

Besides improved industrial activity, retail inflation fell to a 30-month low of 7.31 per cent in June as prices of food items, including vegetables, came down. Wholesale Price Index (WPI) based inflation in June fell to 5.43 per cent after rising to a five-month high in the previous month.

Committed to keeping the economy on a disinflationary course, considering CPI inflation at 8 per cent by January 2015 and 6 per cent by January 2016, RBI said that further policy tightening will not be warranted if the economy stays on this course.

"On the other hand, if disinflation, adjusting for base effects, is faster than currently anticipated, it will provide headroom for an easing of the policy stance," it had said.