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RBI to keep policy rate unchanged on June 7, say experts

The Reserve Bank (RBI) is likely to maintain status quo at its monetary policy review on Wednesday as it would like to gauge the impact of GST rollout on inflation, say experts. However, industry and government are pitching for a rate cut to boost GDP growth which fell to 7.1 per cent in 2016-17 from 8 per cent in the previous fiscal.

“Given the inflation trajectory and as the liquidity in enough in the market, it is unlikely that there would be any rate cut this time. I think commentary of the policy will be benign,” State Bank of India DMD and Chief Financial Officer Anshula Kant told PTI.

The six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel will meet on June 6 and 7 for the Second Bi-monthly Monetary Policy Statement for 2017-18.

“I do not think RBI will cut repo rate in the upcoming policy. They will wait for CPI data before taking a call.

The tone of the policy is likely to be dovish,” Union Bank of India executive director Vinod Kathuria said.

Retail inflation, based on Consumer Price Index (CPI), dropped to multi-year low at 2.99 per cent in April over last year, mainly due to lower cost of food items, including pulses and vegetables. CPI inflation stood at 5.47 per cent in April 2016.

At the same time, inflation based on the wholesale price index slipped to a four-month low of 3.85 per cent in April as both food articles and manufactured items showed cooling in prices.

GST, which government intends to roll out from July 1, is likely to be inflation neutral as per official estimates.
On April 6, the Reserve Bank had left its benchmark lending rate unchanged at 6.25 per cent for the third monetary policy review in a row, citing upside risk to inflation.

According to India Inc, the time is opportune for the Reserve Bank to cut interest rates as inflation is likely to remain at moderate levels.

“The RBI and the Monetary Policy Committee are being cautious in not recognising the significant decline in inflation. Global commodity prices have moderated and food prices are down,” CII said.

According to a Nomura report, the RBI is expected to tread a cautious path.

“… given much of the ongoing drop in inflation is due to transitory factors and given other factors that will reverse (narrowing output gap, remonetisation, house rent allowance increase), we continue to see the RBI’s next move as a hike rather than a cut,” it said.

Echoing the view, ICRA said RBI is unlikely to cut rates at its policy review next week but the tone of the statement will be less hawkish than the previous one.

“Several inflation risks highlighted by the MPC (monetary policy committee) in April have subsequently abated, with the improved outlook for monsoon, rate structure of the goods and services tax (GST) and easing of commodity prices,” it said.

However, a Bank of America Merrill Lynch (BofAML) report said it expects the RBI to cut rates by 25 bps on August 2, with May CPI inflation slowing below 2.5 per cent.

“We grow more confident of our contrarian call of a 25 bps RBI rate cut on August 2. We are tracking May CPI inflation at about 2.5 per cent, at the lower end of RBI’s 2-6 per cent mandate, with daily data showing food inflation continuing to fall in May on a good summer rabi harvest,” it added.

PTI