Forbes India 15th Anniversary Special

RBI Set to Keep Rates on Hold

Analysts, economists bet on a prolonged pause continuing as inflationary pressures have eased

Salil Panchal
Published: Jan 27, 2014 05:41:24 PM IST
Updated: Jan 27, 2014 05:51:39 PM IST
RBI Set to Keep Rates on Hold
Image: Danish Siddiqui / Reuters
RBI governor Raghuram Rajan

India's hawkish central bank is likely to keep its key interest rate unchanged at its policy review on 28 January as inflationary pressures eased off sharply in December.

Most economists predict the Reserve Bank of India to keep rates on a "prolonged" hold after the widely watched wholesale inflation rate fell sharply to 6.16 percent in December from a 14-month high of 7.52 percent in November.

India's December retail inflation has also declined to 9.87 percent due to a fall in vegetable prices.

"We expect a prolonged pause in rates," said Shubhada Rao, chief economist with Yes Bank. "With growth still weak and inflation starting to wind down, the pressure to hike rates has reduced dramatically," she said.

The RBI governor Raghuram Rajan, who took charge in September last year, would also prefer to watch the fiscal policy to come out when a new government takes charge after general elections in May, economists said.

India's current account deficit -- which stems mainly from huge oil and gold imports and weak exports amid the global economic downturn -- hit a record 4.8 percent of GDP in the fiscal year to March 2013 and caused obvious discomfort to foreign investors.

The deficit had narrowed to 1.2 percent of GDP in the July to September quarter of the current fiscal year, official data showed, after the government kick-started measures to reduce imports of non-essential items, such as gold.

The RBI had raised rates in both September and October last year, saying it was determined to fight inflation, but government and business leaders continue to clamour for a looser monetary policy to help spur a sharply slowing economy. Industrial output shrank 2.1 percent year-on-year in November, the worst performance in six months.

The scandal-tainted Congress-led government is desperate to tame inflation and revive the economy as it seeks a third term in office after national elections due by May.

The benchmark repo rate, at which the RBI lends to commercial banks, is at 7.75 percent but Rajan -- who has chaired three monetary policy meetings -- had issued a warning last month that it "will act" to tighten monetary policy if inflation starts to soar further.

"This time we expect a status quo. In fact going forward, the chances of more rate action this fiscal year appears low,"said Dr. Devendra Pant, chief economist with India Ratings, a Fitch group firm.

"Clearer monetary policy action could be expected after the budget from the new government," Pant said.

Siddhartha Sanyal, chief India economist with Barclays Capital, said: "The momentum of inflation is a lot weaker. The bank is likely to keep rates on hold." But Rajan would continue to sound hawkish tomorrow, Sanyal said, as inflation, though tapering off, is still well above the bank's comfort zone of 5 percent.  

Rao from Yes Bank said that though "worst pressure points of inflation" are behind us, it is still some time away befor the RBI thinks of starting to cut rates. "He will want to see fiscal consolidation from the new government coming into place,"she said.

India posted growth of 4.8 percent in the second quarter ended September, far below the near double-digit expansion enjoyed when the economy was booming.

Finance Minister P. Chidambaram expects the economy to expand by five percent this financial year, but some private economists see growth as low as four percent.