RBI likely to keep rates unchanged in August

This is contrary to the expectations of a majority of analysts predicting for another hike given the rise in inflation lately, including domestic ratings agency Icra

The Reserve Bank of India (RBI) will go for status quo in key policy rates in its August policy review, the economic research department of country's largest lender SBI said on Tuesday.

The call is contrary to the expectations of a majority of analysts predicting for another hike given the rise in inflation lately, including domestic ratings agency Icra which came out with its expectation of a hike on Tuesday.

"We believe August rate decision is a close call, though we believe status quo rather than a hike looks the best option," the SBI economists said in a note.

It added that the only reason why the RBI may go for a hike will be "to satiate the self fulfilling prophecy of market expectations" of a rate hike to stem the rupee depreciation.

The note said risks to inflation, which rose to 5 per cent for June, are "evenly balanced", and hike in minimum support prices (MSP) for agri commodities would only "statistically push up" consumer price inflation by 0.73 per cent.

However, it added that such an eventuality is unlikely.

It said the impact from MSP can also be negated by the decline in oil prices which have given a breather to the economy.

With concerns being raised on the surge in core inflation or the price rise excluding energy and food, it said the rise is not broad based and expected the number to come down to 4.5 per cent by March from the 6.5 per cent for the June quarter.

However, it said that food prices may move up, particularly so for cereals, due to the uneven spatial distribution of the monsoon.

RBI's monetary policy committee will start its rate review meeting from July 30 and is expected to announce its call on August 1.

It had voted unanimously for a rate hike of 0.25 per cent at the last review in June.

"In the upcoming policy, RBI should adopt the wait-and-watch stance as outlook on inflation is still stable and there are global uncertainties regarding the policy stance adopted by other central banks," the SBI note said.

On the global situation, it pointed out that the US has already started normalisation of its monetary policy, with expectations of a third rate hike for September, while the European Union is also reducing the monthly pace of asset purchases.

Meanwhile, expecting a rate hike on August 1, Icra's managing director Naresh Takkar said the agency feels there will be hikes of up to 0.50 per cent in the next three quarters of fiscal 2018-19.

Photograph: Shailesh Andrade/Reuters