RBI expected to stand pat, words weighed for future cuts

The rupee has fallen more than 4 per cent against the dollar since the end of January while Indian equities are barely in positive territory this year.

While retail inflation in June rose to an eight-month high of 5.4 per cent, the overall Wholesale Price Index (WPI) based inflation was (-) 2.4 per cent in the same month.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “We expect at least two – and very possibly three – of the nine MPC members to vote at the August meeting for interest rates to be lifted to 0.75%”.

The Central Bank of Trinidad and Tobago has now raised its rate by a total of 150 basis points since embarking on its tightening campaign in September 2014.

Inflation has fallen to zero – meaning prices are no higher than they were last year – but some central bank officials fear it could rise back above the 2 per cent target in the coming years if rates stay at rock bottom.

First, the monsoon-the biggest worry of RBI-is nearly on track.

RBI Governor Raghuram Rajan has said that the plans for lower food output is needed to be in place, global financial markets were volatile, factory output was recovering unevenly, the services sector was emitting mixed signals, fuel inflation was up, exports were down and liquidity had improved.

While there was consensus the last time round about the likely outcome, brokerages and economists seem to be split this time about whether a rate cut is likely or whether its going to be a status quo today.

The Bank of Thailand’s Monetary Policy Committee (MPC) is expected to keep its policy interest rate unchanged Wednesday, opting to assess the second quarter’s GDP before making further monetary easing, say economists.

However, there is a faction in the government that favours curbing the RBI’s independence and that endorsed the latest version of the draft code. “We have seen favourable developments on the supply side for India”, Faraz Syed, associate economist at Moody’s Analytics, told ET from Sydney. Moving to the new model would severely dent the RBI’s competency: “Credibility would be lower, politics would drive decisions, and transparency would be reduced”, Moody’s said.

“The next Monetary Policy Announcement is scheduled for September 25th 2015”. “So we expect food inflation to remain more subdued, certainly lower than perhaps what the RBI may have expected back in June”.

By raising interest rates three times in his first months in office, Rajan quickly established his inflation-fighting credentials and, together with the enthusiasm generated by Narendra Modi’s victory in a parliamentary election in May 2014, was responsible for the dramatic improvement in sentiment towards India. A renewed fall in oil prices and expectations in markets that the BoE will raise rates sooner than it had envisaged in May could also slow the rise in British inflation.

It said the proposed changes would curtail the authority of the RBI and render it totally ineffective in discharging its responsibilities on monetary policy, financial stability and targeting inflation.