RBI governor Raghuram Rajan had raised rates after taking over the reins at Mint Street and continued the fight against inflation but in December he left rates unchanged, considering the weak state of the economy and the "wide bands of uncertainty surrounding the short term path of inflation..."
RBI governor Raghuram Rajan had raised rates after taking over the reins at Mint Street and continued the fight against inflation but in December he left rates unchanged, considering the weak state of the economy and the "wide bands of uncertainty surrounding the short term path of inflation..."
Since then, inflation both measured by the wholesale price index and the consumer price index have moderated. Retail inflation slowed to 9.8% in December, while WPI inflation moderated to a five-month low of 6.2% during the month, providing relief to policymakers and the central bank grappling with stubborn price pressures. If the central bank holds rates, it would also bring some temporary relief to those paying installment on home loans. Rising interest rates have upset the budget of households, resulting in higher outgo on mortgage payments and has fuelled anger against the government over high prices. "There finally was some respite in the economy with CPI and WPI both witnessing a significant drop in the month of December 2014. However, this deceleration in inflation figures occurs largely on account of a decline in food inflation," said Madan Sabnavis, chief economist at Care Ratings.
"The expectation is that the RBI will keep repo and marginal standing facility rates unchanged in the policy announcement on January 28, 2014. A rate cut can be expected only in March if inflation maintains its downward trajectory in the coming months," said Sabnavis. The central bank would also like to wait for more evidence on the price front. Weak industrial growth has attracted calls for rate cuts from India Inc.The government heading into national polls later in the year would prefer that the central bank take steps to boost growth. Growth slowed to a decade low in 2012-13 and is expected to be close to 5% in the current financial year, prompting calls for growth-boosting measures.
Some economists expect the monetary policy review on Tuesday to be a close call on interest rates. "RBI's last monetary policy statement literally stated that it would raise the policy rate if headline inflation did not decline significantly, or if core inflation did not fall.
While the first condition was not met, the latter was. If the RBI were to strictly adhere to its forward guidance it would, therefore, hike rates on January 28," said Leif Esekesen, chief economist for India and Asean at HSBC. "However, we believe it will remain on hold, hanging its hat on the decline in headline inflation and the weakening growth momentum. But, it is going to be another close call," he said.
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