Mumbai: Reserve Bank Governor Raghuram Rajan is widely expected to hold the key rates citing high inflation at the fourth bi-monthly monetary policy announcement on Tuesday, even though the pro-growth lobby has been wishing for a rate cut.
This is despite some downward movement in consumer price inflation of late, which eased to 7.8 per cent for August. But it is the medium-term targets that worry the central bank, say RBI watchers.
The RBI is targeting to ease the CPI number to 8 per cent by January 2015, but it is the January 2016 target of 6 per cent, which the RBI had voiced concerns about in the last policy review held in August, saying there are ‘upside risks' to the number.
Wholesale price index (WPI) inflation has also eased, although more sharply, to 3.74 per cent in August from 5.55 per cent at the start of the current fiscal.
Rajan, who has repeatedly opined that he wants a sustainable solution to the inflation problem and fight the battle in one go, had recently said he would not cut the rates only to be hiked again as inflation remains sticky.
"I have no desire to keep interest rates high for even a second longer. I want to bring down interest rates when its feasible. It will be feasible when we would have won the fight against inflation," he had said at a banking event earlier this month.
"The real problem is inflation that is persistent. We have been emphasising again and again in order to 'break the back' of inflation, we got to break this persistence," Rajan had said in what is another hint of things to come.
Rajan has hiked the rates thrice since assuming charge as the Governor in September last year and the repo rate, at which RBI lends to the banks, stands at 8 per cent at present.
The industry has for long been asking for a rate cut to boost the growth, which came in at 5.7 per cent for first quarter.
Bankers also believe that it may not be the right time for a rate cut yet.
State Bank of India chairperson Arundhati Bhattacharya said, "RBI is likely to keep the interest rate unchanged."
Echoing similar views, Bank of Baroda Executive Director Rajan Dhawan said that the RBI would not change interest rates in the policy review because of inflation overhang.
Credit rating agency Care said RBI has less room to cut policy rates on September 30 as there remains an upward threats to inflation going ahead.
"Given the economic parameters of improving growth of 5.7 per cent (Q1 of FY15) GDP and elevated retail inflation on the back of potential threats to inflation going ahead, we do not foresee any room for a rate cut in the upcoming policy announcement," Care said in a report.
Canara Bank chairman and managing director RK Dubey said RBI will lower the rates only if inflation comes down consistently for a few months.
"So, I expect some change in rates only by January," Dubey said. Rajan had pointed to a narrowing of the growth in factory output, calling the recovery ‘uneven', but asserted the need to check inflation first.
He also asked the industry to slash its prices to help fight the inflation so that the long-standing wish of a rate cut can be made.
Market participants, however, will closely watch the tone of the monetary policy.
The RBI had lowered the statutory liquidity ratio, the portion of deposits that banks are required to keep in government bonds, by 0.5 per cent to 22 per cent from 22.5 per cent unlocking about Rs 40,000 crore into the system at the last policy review. In the May policy as well SLR was cut by 0.5 per cent, releasing Rs 40,000 crore into the system.
According to Care Rating, RBI may not cut SLR on September 30 but even if it slashes SLR it won't come as a surprise. "It (SLR cut) could probably be a part of the long-term goal of lowering the SLR rather than a short-term measure," Care Rating said.
However, FirstRand Bank treasury head Harihar Krishnamoorthy feels that the Governor may cut SLR by 25 bps. Indian Banks Association chief executive MV Tanksale said there is no need for an SLR cut now as credit pick up is slow and also there was no urgent need of liquidity.
