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Markets expect RBI status quo on rates in August

Reserve Bank of India

New  Delhi:(IANS) The Reserve Bank of India (RBI) is expected to hold interest rates at its monetary policy review next week and is more likely to cut rates by the end of the year with more clarity  on the monsoons, according to market observers.

Saying the RBI is likely to stay on hold at the policy review meet on August 4, Bank of  America-Merrill Lynch said in a research note: “We continue to expect the RBI to cut rates another 50 basis points (bp) with inflation well set on its ‘under-6 percent’ January 2016 target.”

It said it expects RBI to cut another 25 basis points in September and a final rate cut on  February 2.

HSBC said if rains remain non-disruptive and the RBI’s 6 percent inflation target for January 2016 is within reach, then “space for a final 25 bp could open up, but not more than that.”

“We believe a fresh round of rate cuts beyond 2015 looks unlikely,” it added.

At its last review in June, RBI cut the repo rate, at which it lends short-term to commercial banks, from 7.5 percent to 7.25, but left other parameters like the cash reserve ratio(CRR) and statutory liquidity ratio (SLR) unchanged at 4 percent and 21.5 percent, respectively.

June was the the third repo cut this year, while the central bank had indicated that there may not be any further cuts in the near term.

According to the Export-Import Bank of India, the rising trend in inflation seen over the last two months and the rainfall deficits are expected to weigh over the considerations of weak economic performance.

“Consequently, policy rate  cut by the RBI in its third bi-monthly policy appears bleak. RBI is likely  to maintain status quo on rates in its bi-monthly policy meet on August 4,” it said.

Consumer price-indexed (CPI), or retail, inflation rose to an eight-month high of 5.4 percent in June on costlier  food, fuel, housing, clothing and footwear.

“The decline in commodity prices in general has given the RBI room to cut interest rates,”  Moody’s Analytics said.

According to India Ratings and Research, the RBI  is likely to wait and watch on rates.

“A more appropriate time for a rate cut would be the second half of FY16,” the agency  said.

“Ind-Ra expects the policy stance to reflect RBI’s continued intention to anchor both inflation and inflationary expectations. This has become even more important for RBI after its agreement with the government to follow a framework of inflation targeting,” it added.

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