Reserve Bank is unlikely to soften its monetary stance in its policy review later this month due to high inflation even though sluggishness in industrial output growth for May calls for cut in policy rates, say experts.
The Reserve Bank of India (RBI) is guided by inflationary expectations. Inflation is expected to remain high, HDFC Bank chief economist Abheek Barua said.
“I do not think there will be either infusion of liquidity or cut in policy rates by the RBI in its quarterly policy review,” he said.
Crisil chief economist Deepak Joshi said, “Monetary policy is not going to be changed. I think RBI will keep it on hold. Going by the assessment of the economy, I think there will not be any rate cut.”
The index of industrial production (IIP)– gauge of industrial activity in terms of production — showed a just 2.4% growth in May. It was much below than 6.2% growth during the same month a year earlier.
However, IIP numbers for May are better than the previous month’s 0.9% contraction.
HSBC Global Research said though IIP picked up on an improved sequential momentum and last year’s low base, inflation is still high.
“Growth remains moderate and will remain constrained going ahead, but high inflation and the structural nature of the slowdown limits the scope for RBI to move,” it added.
Expressing concerns over decline in IIP growth, Commerce and Industry Minister Anand Sharma said the government will ask the Reserve Bank of India (RBI) to reduce interest rates in its month-end quarterly monetary policy review.
“We will urge the RBI to revisit this issue (interest rates) to ensure that capital is available to the industry .. given the slowdown there is every justification to ensure that Indian industry remains competitive and the manufacturing grow,” Sharma told reporters here.
Experts, however, said that fuelling growth momentum by way of slashing interest rates is a necessary action at this point of time, but high inflation indicates there will be less action by RBI to cut interest rates or even infuse liquidity.
RBI will unveil its first quarterly review of monetary policy 2012-13 on July 31.
The wholesale price-based inflation was 7.55% in May. Retail price-based inflation for the same month, however, was higher at 10.36%.
Industry body PHD Chamber said the RBI should focus on re-capturing growth.
Discarding a knee-jerk reaction by RBI, it said gradual policy rate cuts by RBI may not be ruled out. “We are anticipating a cut in the repo rate by 50 basis points (0.5%) on July 31, while a total cut of 200 basis points (2%) by December 2012,” PHD Chamber chief economist S P Sharma said.
Citi Research, a division of Citigroup Global Markets, said monetary easing by RBI in the immediate term is unlikely because of its stance on inflation.
However, it expects 0.5% to 0.75% rate cut for the full year.
Ratings firm ICRA said the inflationary concerns are likely to dominate monetary policy in the near term.
“With a low probability of any meaningful easing of retail or wholesale inflation in the forthcoming data for June 2012, the RBI may maintain policy rates at current levels in the first quarter policy review,” it said.
(curtsey : money control)
Head Research Department
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