RBI seen taking dovish stance

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Mumbai: In their first monetary policy announcement due Tuesday, Reserve Bank of India (RBI) governor Urjit Patel and the rest of the monetary policy committee (MPC) members are likely to maintain an accommodative stance as concerns over growth takes precedence over inflation, a Mint poll found.

Economists are, however, divided on whether the committee will announce a rate cut on Tuesday. Out of the 10 that Mint surveyed, five expect at least a 25 basis point (bps) rate cut, while the rest anticipate the repo rate will be kept unchanged at 6.5%. A basis point is one-hundredth of a percentage point.

The sharper-than-expected decline in food prices in August and a normal monsoon have opened up space for a rate cut on 4 October by Patel and the newly constituted monetary policy panel.

State Bank of India (SBI), India’s largest lender, expects the policy rate to be cut by as much as 50 bps.

“The pick-up in growth has been gradual. The MPC’s monetary policy stance is likely to take into consideration the outlook on growth in the medium term,” said Soumya Kanti Ghosh, chief economic adviser at SBI.

All economists surveyed said the recent slowing of consumer price inflation, normal monsoon and the government’s push for growth will play a part in what the rate-setting panel decides to do.

The panel, which currently includes Patel, deputy governor R. Gandhi, executive director Michael Patra and government nominees Ravindra Dholakia, Pami Dua and Chetan Ghate, is meeting on Monday and Tuesday, before the central bank chief announces the monetary policy.

Retail inflation, which had quickened to 6.07% in July owing to a spike in food prices, slowed sharply to 5.05% in August, driven by a drop in vegetable prices. About 90 bps of the 102 bps month-on-month fall in CPI was due to vegetable prices, Citibank economists Samiran Chakraborty and Anurag Jha said in a 12 September note.

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RBI’s target is to achieve a 6% CPI target by March 2017 and a 4% target in the long term. With inflation well within the central bank’s estimates and growth prospects looking grim, the monetary policy is likely to be dovish, economists said.

By December, the central bank would have at least two more months’ worth inflation data, which will prove that CPI is indeed under control.

“There are risks in the form of HRA (housing rent allowance), FCNR (foreign currency non-resident) deposit outflows and liquidity tightness owing to telecom spectrum payouts and increased food credit due to bumper crops. RBI would ideally want to wait before these pass,” said Harihar Krishnamoorthy, treasurer at FirstRand Bank.

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The redemption of FCNR deposits raised by banks in 2013 could lead to outflows to the tune of about $20 billion in the latter part of October, experts estimate.

Abheek Barua, chief economist at HDFC Bank Ltd, who had earlier rooted for a rate cut in September, has now changed his view owing to the developments on the India-Pakistan border. “War or any form of conflict is likely to be inflationary for the country. The MPC might want to wait and see how the situation resolves itself before announcing a rate cut,” Barua said.