My Notes by Dr. Khan

Policy review: RBI unlikely to go in for significant rate cuts

The Reserve Bank of India (RBI) is unlikely to go in for significant rate cuts in its upcoming June 18 mid-term monetary policy review, with a minor 25 basis point repo rate cut accompanied by a pruning of the cash reserve ratio for banks by a similar margin the most likely outcome on the cards.

The broad consensus among economists is that a more ambitious cut in policy rates could come through only later, possibly in July, as the central bank will have more certainty on data — on growth, monsoon or the fate of the European economy — by then.

The pressure on the RBI to prune rates has been building, especially in the wake of the GDP growth data for the fourth quarter, which came in at 5.3 per cent, a nine-year low. Added to this is that fact that Brent crude prices are down almost 20 per cent since April and continuing nervousness over the developments in euro zone, where a Greece exit is feared. To boot, China made a surprise 25 basis points cut last week to boost growth expectations.

The RBI had cut the repo rate by 50 basis points in its policy review in April. Two important economic data sets-inflation for May and industrial production for April - are scheduled in the week ahead, but analysts claim they are unlikely to influence the outcome of the RBI review beyond a point. Industrial production, which will be announced on Tuesday, is expected to rise 1.7 per cent in April from last year, compared to the 3.5 per cent decline the previous month, according to Barclays.

Inflation numbers, which will be released on Thursday, is widely expected to come in at 7.5 per cent in May from a year-ago, compared to 7.2 per cent last month.

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