RBI unlikely to cut repurchase rate in wake of high inflation

The Reserve Bank of India is expected to keep the re-purchase rate on hold at its monetary policy meeting scheduled on June 7, Tuesday. The Central Bank will maintain a wait-and-watch move to assess the ongoing and upcoming global and domestic events amid scrutinizing its past policy measures. Moreover, a higher inflation coupled with the late outburst of monsoon this year needs to be addressed properly.

April’s 25bp cut and a host of liquidity supportive measures shifted the RBI’s focus to efficient transmission of the 150bps rate cuts since early 2015. Since then, the RBI has conducted cumulative INR 700bn worth open market operations to reinforce the shift in their stance to keep systemic liquidity close to neutral than in deficit, DBS reported.

Further, the pending decision of the Federal Reserve on June 14-15 whether to stay pat or raise interest rates, along with the June 23 United Kingdom referendum on Brexit are two most important instances which are likely to weigh on the RBI’s decision.

While, the April inflation figures hinted at rising food prices, especially for vegetables, fruits, pulses, meat and fish, the CB would prefer to await the arrival of monsoon to check food prices. Probably post that, we can watch Governor Raghuram Rajan making a move.

In addition, the ongoing crude oil prices which are slightly above the central bank mark, also pose downside restriction to the RBI’s policy stance.

"In terms of policy outlook, we retain our call for another 25bp cut in 3Q before a prolonged pause in the year ahead," DBS said in a research note.

With the latest up move in global oil prices, domestic prices have also jumped notably. Latter’s pass through is already evident in CPI transport and communication component of the CPI, which quickened from 0.02 percent y/y in Apr-Dec, 2015 to 1.7 percent y/y in the quarter ending Mar, 2016.