In a bid to control inflationary pressures, the apex bank is likely to keep key interest rates unchanged in its second bi-monthly monetary review for 2014-15 to be held Tuesday.RBI Governor Raghuram Rajan is known for the primacy he accords to controlling inflation. Food inflation remaining over eight percent may be weighing heavily on his mind, say analysts.Food inflation has become a concern for the government as a weak monsoon has dampened hopes of any easing of prices."We don't expect the rates to be changed in tomorrow's (Tuesday) policy review," said Dipen Shah, head-private client group research, Kotak Securities.The country's key inflation based on the Wholesale Price Index (WPI) was recorded at 6.01 percent in May.
Data released by the Central Statistics Office (CSO), showed that retail inflation based on Consumer Price Index (CPI) declined to 7.31 percent in June from 8.28 percent in the previous month. The central and state governments are taking steps to contain the rising food prices by either directly selling edible commodities or easing grain imports. Tomato price has sky-rocketed in certain areas to nearly Rs.80 a kg. "I do not see any rate change coming in the RBI review, though the event will be closely monitored by the markets," Sanjay Sachdev, chairman, ZyFin Capital, told IANS. The RBI is expected to keep its repo rate (at which it lends money to commercial banks) unchanged at 8 percent.In the last policy review in June, the RBI retained the policy rate, making it the second consecutive time that Governor Rajan kept interest rates unchanged.
The cash reserve ratio (CRR) was also kept unchanged at 4 percent.The statutory liquidity ratio (SLR), the mandatory amount of bonds lenders must keep with the RBI, was cut by 0.5 percent to 22.5 percent of their net demand and time liabilities (NDTL) with effect from June 14. Rajan raised interest rates three times since he took office in September 2013, even as economic growth slowed to decade-low rates.He has set a target of bringing down consumer price inflation to 8 percent by the end of the fiscal, and to 6 percent by the next fiscal.Bank of America-Merill Lynch said it expects the rate cut to happen only in December, if the monsoon normalizes to cool down inflation, or in early 2015 in case the price rise prolongs.
"In our view, the RBI will be on long hold till it is clear that inflation is truly coming off. We think that the expectation of a surprise rate cut on Tuesday, that is gaining currency in some quarters, is unlikely to be met," it said."We have pencilled our first cut for December, if rains normalize, and in early 2015, in case of drought," it added. "We expect the RBI to leave repo rate unchanged at 8 percent in its upcoming policy review. While near-term risks have imparted uncertainty to the inflation outlook, we believe that RBI’s first milestone of 8 percent CPI inflation target for January 2015 is not at risk," Yes Bank said in a report.