Reserve Bank of India (RBI) governor Raghuram Rajan will be announcing the third bi-monthly policy statement on August 9. The event assumes significance as it will be his last, since his tenure ends on September 4 and the next policy statement is due on October 4.
Retail inflation in June was 5.77 percent — almost at a two-year high and close to the upper end of the central bank's inflation target of 6 percent — effectively ruling out the possibility of a rate cut. Analysts expect the repo rate (also policy rate) to remain unchanged at 6.50 percent.
"We expect Reserve Bank of India (RBI) to maintain status quo on policy rates in the monetary policy review on August 09, 2016. Headline inflation has stayed elevated over the past 3 months and, in fact, is anticipated to remain so for the next couple of months on vegetables and pulses," Kapil Gupta and Prateek Parekh, analysts at Edelweiss Securities Limited, said in a note on Friday.
"Ergo, in our view, the central bank will refrain from cutting rates in the forthcoming review," they added.
Another analyst is of a similar view and expects inflationary trends to persist for a couple of months, reducing the legroom for a rate cut in the near future.
"The inflation path will also be a key trigger, after 2Q16 CPI prints accelerated on higher food prices and fading base effects of low oil prices. This uptrend is likely to sustain in July-August before softening modestly," Radhika Rao, economist, group research at DBS Bank said in her note a few days ago.
She added that a 25 basis point cut was possible in the last quarter, effectively ruling out hopes of a reduction in next month's announcement.
The possibility of enabling conditions giving enough room for Rajan's successor to bring down the interest rate is high, according to analysts, based on a good monsoon and its impact on foodgrain production.
"Monsoon is progressing normally and, specifically, sowing patterns point to a bumper pulses output this season. Our historical analysis indicates that every time India's pulses output picks up, disinflation/deflation sets in lasting 6-12 months," Kapil Gupta and Prateek Parekh said in their note.
They added that an overall 50 basis point cut is likely this fiscal. "In light of above considerations, we believe Mint Street will hold rates in its August policy review. However, we stick to our call of another 50bps easing in the current fiscal."
Rajan's three-year term at the RBI ends on September 4 and the Narendra Modi government is yet to announce his successor.
