Will the Reserve Bank of India cut interest rates or will it stay on a pause mode seems to be the biggest question everyone is asking. The bi-monthly monetary policy committee headed by RBI governor Urjit Patel meets over June 6-7 and it has a lot to ponder. Consumer inflation on the one end has slipped well below the central bank's target, economic growth on the other end has tumbled and overseas, US jobs growth surprisingly slowed in May.
Yet, while economists say a small window may have opened for a rate cut ahead of the Goods and Service Tax that will be rolled out from July 1, the central bank, which changed its stance from accommodative to neutral in February, is more likely to keep interest rates on hold, given the uncertainties around GST, monsoon and the impact of seventh pay commission's pay hikes, house rent allowances among other things.
In the monetary policy announcement in April, RBI left repo rate unchanged at 6.25 per cent, even as it raised the reverse repo rate to 6 per cent, thus narrowing the margin of monetary policy corridor to 25 basis points from the earlier 50 basis points.
The second bi-monthly monetary policy announcement on Wednesday comes in the backdrop of the GDP growth, which slumped to 6.1 per cent in Jan-March quarter. The fall in GDP was largely due to the impact of the government's decision to ban high value currency notes last November.
Consumer prices rose by 2.99 per cent in April, its lowest in at least five years.
“We expect RBI to stay on hold and maintain its neutral monetary policy stance,” said Sonal Varma, chief India economist at Nomura Securities.
“We expect RBI to acknowledge the recent inflation undershoot, but remain cautious, as the drop was driven by transitory factors and due to uncertainties emanating from the GST, monsoons and house rent allowance increases,” said Varma.
Kotak Institutional Equities Economist Suvodeep Rakshit believes RBI will soften its tone in the policy statement, but headline inflation expected to rise in the second half will prompt it to remain paused.
“With average first half FY18 inflation likely to be 130 basis points lower than RBI's estimates, the policy stance should soften as early as in the June meeting to acknowledge the significant downward bias to its estimates...Even as we expect RBI's tone to soften, we continue with our call of an extended pause as the second half FY18 headline inflation is likely to still remain higher than the medium-term target of 4 per cent,” said Rakshit.
Looking ahead, Care Ratings chief economist Madan Sabnavis too expects no change in repo rate on Wednesday, but expects a 25 basis points rate cut around October.
“RBI could continue to monitor the inflation situation and could initiate a rate cut after September if the inflationary impact, if any, of GST and the pay hike (seventh pay commission salary hike, allowances etc) is within the acceptable limits,” Sabnavis said.
Nomura expects policy rates will stay on hold throughout 2017, but there could be some interest rate hikes post April 2018.