The Reserve Bank of India (RBI) is widely expected to hold interest rates at its monetary policy review on Tuesday.According to the Export-Import Bank of India, the rising trend in inflation seen over the last two months and the rainfall deficits are expected to weigh over the considerations of weak economic performance." Consequently, policy rate cut by the RBI in its third bi-monthly policy appears bleak," Exim Bank said in a report.Consumer price-indexed (CPI), or retail, inflation rose to an eight-month high of 5.4 percent in June riding on costlier food, fuel and housing.At its last review in June, RBI cut the repo rate, at which it lends short-term to commercial banks, from 7.5 percent to 7.25.It was the third repo cut this year in June, while the central bank had indicated that there may not be any further cuts in the near term.Making the first rate cut of the year in January, RBI Governor Raghuram Rajan had said that "the key to further easing are data that confirm continuing disinflationary pressures and sustained high quality fiscal consolidation".Finance Minister Arun Jaitley had extended in the budget the target deadline for controlling fiscal deficit to three percent, reasoning that insistence on a timetable to contain the deficit would harm growth prospects.
The targets for next three years have been set at 3.9 percent for 2015-16, 3.5 percent for 2016-17, and 3.0 percent for 2017-18.Official data last week showed the fiscal deficit in the first three months of current fiscal already stood at Rs.286,000 crore, or 51.6 percent, of budget estimates for 2015-16.Meanwhile, American research firm Moody's Analytics, in a report last week, warned against the National Democratic Allicance government's moves to tamper with the autonomy of the RBI in deciding on interest rates as potentially damaging for the economy."We believe that a government-elected panel undermines the RBI's independence. Moving to the new model would severely dent the RBI's competency: Credibility would be lower,politics would drive decisions, and transparency would be reduced," Moody's said.The government last month released the draft Indian Financial Code, which proposes to remove the RBI governor's veto right in the monetary policy committee.Besides taking away the RBI governor's authority to veto interest rate decisions, the draft also proposed that the monetary policy committee would have four representatives of the government and only three from the central bank, including the RBI "chairperson".
"Overall, we believe that tampering with the central bank's independence would make it difficult to anchor inflation expectations. This would weigh on India's economic prospects, particularly financial market stability," the report said."But given the criticism of the draft bill, it is unlikely to pass parliament," it added.Terming the measure as a "dangerous road ahead", it said India's monetary policy, with Governor Rajan at the helm, has been effective.Jaitley, in his first full budget, had announced a monetary policy committee pact earlier with the RBI that will reduce the governor's power to act alone. Themonetary policy committee and an official inflation target for the RBI are going to come about through the biggest post-Independence overhaul of the RBI Act, 1934.
However in May, in a big backtrack by the government, Jaitley withdrew from the Finance Bill the clauses pertaining to setting up of a public debt management agency(PDMA) and the amendments to the RBI Act that would have taken away its powers to regulate government securities.The United Forum of Reserve Bank Officers Employees had earlier written to MPs and chief ministers of various states that the changes, if implemented, would cripple the functions of the central bank. It said the proposed changes would curtail the authority of the RBI and render it totally ineffective in discharging its responsibilities on monetary policy, financial stability and targeting inflation.