India’s household inflation expectations up for 3rd straight quarter

Similarly, factory output growth dropped in May, but the point to note is that it has now been positive for five months in a row, and the average growth since January at 3.5% is much higher than what we had seen in the second half of past year.

Apart from the hopes of rate cut in future, the fact that Rajan pushed banks to cut the lending rates has also come as a positive to the markets.

Bankers, however feel RBI will be conservative in reducing rates further as retail inflation, its prime most concern, continues to rule at eight-month high of 5.4 per cent in June. The monetary policy statement by RBI highlighted that despite a 75 bps cut in repo rate, median base rates have fallen only by 30 bps.

The Reserve Bank of India (RBI) is probably going to hold interest rates unchanged at its monetary policy review on Tuesday.

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While Modi’s government agreed to an inflation target of 2-6% earlier this year, the draft bill threatens to water down the proposal. Rajan has cut the rate three times this year, easing along with China. “But the food price outlook comes with a great degree of uncertainty, which is why we think the central bank will prefer to maintain a conservative stance at this stage”. The risks around the six per cent target were broadly balanced. Also, there was no noticeable expansion of bank credit despite the three successive cuts in the policy rate.

Anxious about inflation, but lowers projections: The policy statement shows that the RBI expects inflation to be worrying in the next few months, due to inflation in vegetable-pulses-milk rising. Any increase in U.S. rates decided at a Federal Reserve meeting earlier that month is expected to suck money out of emerging markets.

Kunal Shah of Kotak Mahindra Old Mutual Life Insurance said: “Given the frontloading of cut in June policy, the RBI will monitor transmissions by banks in terms of lower lending rates, full monsoon performance by September and external events like commodity prices and Federal Reserve rate policy”.

The reverse repo rate under the LAF will also remain unchanged at 6.25 per cent, and the marginal standing facility (MSF) rate and the Bank Rate at 8.25 per cent, RBI said.

The BoE’s rate-setters must decide whether the effect of cheaper imports and reduced demand for British products overseas will last long enough to justify a cut to its forecast for inflation in two years’ time.

Talking about the structure of the proposed monetary policy committee (MPC) and setting up of a Public Debt Management Agency (PDMA), Mr Rajan said it would require legislative changes and could take years. Rajan said there are no differences between the government and the central bank, adding they have reached a consensus on what the committee should look like and what the powers of the governor should be. “That is what we are engaged in”, said Rajan while sharing the intent of RBI actions.

Indeed, retail inflation will ease in July and August because of a base effect, but food inflation remains a concern.