Seven reasons RBI’s Raghuram Rajan is likely to hold key policy rates today

Mumbai: The Reserve Bank of India is expected to keep key policy rates unchanged in its monetary policy meet in the day. There are several reasons why experts and the market don’t expect Governor Raghuram Rajan to cut rates. However, most of them agree that the next round of rate cuts will come in the next monetary policy meet in February. “He should cut a final 25 basis points in February,” BofA-ML said in a research note.

RBI Governor Raghuram Rajan

Here’s why Raghuram Rajan may not cut rates:

1) Rajan surprised markets and the government by dishing out a 50 bps rate cut in the last monetary policy. However, he went as far as saying that this wasn’t an early Christmas gift, and that he expected banks to pass on the benefit of the rate cut to its customers. “We expect Rajan to pause on Tuesday, given the 50 bps surprise cut last time,” BofA-ML said.

The bankers argue that Rajan has already “front-loaded” rate reductions and is now keen on policy transmission of a his cumulative 125 bps cut so far this year by the lenders.

2) Inflation, after being at historic low levels in August and September, crept up to four-month highs in October, mainly on the back of a jump in vegetable and pulse prices. Inflation in October rose to 5% from 4.41% in September, however, the RBI is still well on its way to achieve its target of under 6% inflation by next year.

3) RBI has also been cautious ahead of an expected rate increase by the US Federal Reserve, which meets in mid-December. There is a possibility that interest rates in the US might eventually go up for the first time since the global economic crisis of 2008. Federal Reserve rate-setters are meeting on December 15-16 to take a call on this.

4) India’s GDP grew at 7.4% in the April-September period, meeting market expectations. The country’s growth in percentage terms, trudged ahead of China’s once again. The signs of recovery in the GDP, from a growth rate of 7% in the previous quarter ended June 30, follows a series of rate cuts announced by the RBI in recent months and bolstered the case for the central bank to hold onto its rate at its scheduled monetary policy review meeting on Tuesday.

5) Analysts are of the view that the Reserve Bank of India is likely to wait for the Budget announcement before proceeding further and the impact of the 7th Pay Commission recommendations.

6) The rupee has been volatile this year, with its value eroding against the dollar after China devalued its currency earlier this year, to make its exports more competitive in the international market. This started a currency war in the emerging markets, with most declining to nearly all-time lows.

The central bank is also mindful of the inflationary impact of a falling rupee, which has already hit a two-year low against the dollar again recently.

7) A turmoil in the Middle East after Turkey shot down Russia’s fighter jet will likely make the apex bank keep its benchmark rate unchanged, trade body Assocham says.

“Fast changing geo-political situation in the Middle East and the increased terror threat with consequent economic costs will surely weigh on the RBI’s policy stance which is not expected to give any more cut in the interest rates in the upcoming review,” it noted.