Monetary policy review: RBI governor Raghuram Rajan likely to keep rates unchanged

MUMBAI: Reserve Bank of India governor Raghuram Rajan is expected to hold interest rates in his monetary policy review on Tuesday .However, bankers are hopeful that the central bank will cut rates one more time this fiscal in the fourth quarter.

The RBI is expected to maintain status quo on three accounts. First, it has already front-ended the reduction by lowering interest rates by 50 basis points in its previous policy. Second, the benefits of the 125-basis-point cut in rates has not yet been fully passed on to borrowers by lenders. Thirdly , with the rupee under pressure and inflation creeping up to 5 per cent, the RBI would not want to risk sending the wrong signals.

Although Rajan had in his previous monetary policy said that the RBI would maintain an accommodative stance, a more recent indication provided in an interview pointed to a pause. "What we said in our monetary policy statement, it is essentially we have looked at all the room we had and taken full advantage. So, until more room builds up, I think we are comfortable with where we are," he had said.

"We expect Rajan to pause on Tuesday , given the 50-bp cut last time. He should cut a final 25 bps in February . We see little headroom to cut rates after this," said Indranil Sen Gupta, India economist at DSP Merrill Lynch. According to Sengupta, "If we use medium-term about-7 per cent consumer price index inflation as a proxy for inflation expectations, policy rates, at 6.75 per cent, are already negative ex ante."

While the governor may not cut rates further, the policy is expected to be accommodative with the RBI providing enough liquidity . Moody's analytics said in a report that it expects India's GDP to expand at 7.3 per cent year-on-year in the September quarter."Though the headline growth appears high, India is still operating under a negative output gap. Consumption will likely be a key driver to output in the September quarter. And some strain is expected in the agriculture sector, largely due to lower-than-average monsoon rains. Other partial indica tors of demand suggest that investment will also remain mute; credit growth has been weak on the back of higher non-performing loans which has forced commercial banks to keep lending ra tes high," the report said.

Although the Indian economy is one of the few to register above 6 per cent growth globally, bankers say that there is a lurking fear that funds flow from foreign investors might ebb if they do not see any signs of reforms. A key reform that investors are loo king at is the passage of the GST bill. To that extent, the government's success on the GST bill will have a bearing on RBI's policy-making.