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RBI likely to keep interest rate unchanged in December

By
Government, RBI Chief, Veto Power

Inflation target set to be met; next rate cut seen in February.

Higher retail inflation, coupled with the possibility of a U.S. Fed rate increase in December, may prompt the Reserve Bank of India (RBI) Governor Raghuram Rajan to keep the repo rate unchanged in the December policy review.

The central bank, which reduced interest rates by 50 basis points (bps) in the October policy review, will meet again on December 1 to review its monetary policy stance. The central bank had reduced the benchmark interest rate by 125 bps to 6.75 per cent so far this year as inflation eased and the economic recovery stayed tentative.

“We expect the RBI to pause in the December policy and cut 25 bps in the February policy once there is clarity that retail inflation will achieve the January 2015 mandate of 6 per cent,” said Indranil Sen Gupta, chief economist, Bank of America Merrill Lynch.

The consumer price index-based inflation — RBI’s main gauge for measuring price rise — inched up to five per cent in October, up for the third straight month, compared with 4.41 per cent in the preceding month. This was mainly due to an increase in some food prices in addition to festival related demand.

“We expect the RBI to pause in the December policy and cut 25 bps in the February policy once there is clarity that retail inflation will achieve the January 2015 mandate of 6 per cent .” — Indranil Sen Gupta, Chief economist, Bank of America Merrill Lynch

The RBI had expected retail inflation to go up after September as the favourable base effect wanes. The central bank had also emphasised the need for pro-active supply-side management by the government to head off any food price pressures, especially in respect of onion and pulses. The central bank has projected 5.8 per cent inflation for January 2016.

“We are expecting status quo in the December policy,” said Siddhartha Sanyal, Chief India Economist, Barclays. “There was 50 bps cut in the previous policy review in September. There is no major trigger from the domestic front since then, and on the external side it is likely that U.S. Fed is on course for rate hike, which could be as early as December.”

Inflation, however, is expected to stay within the central bank’s comfort zone, market participants said. The RBI has set a target of six per cent inflation for January 2016.

The central bank is now expected to reduce interest rates further in 2016.

“We believe the next rate cut from RBI will come in the next year. We forecast 50 bps rate cut in the first half of 2016 as retail inflation is likely to stay soft,” Sanyal said.

Wholesale price index (WPI) based inflation continued to stay in negative territory in October, at (-)3.81 per cent, mainly due to softer fuel prices. WPI inflation has remained negative for the last 12 months reflecting continued weakness in corporate sector demand.

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