Mumbai: The Reserve Bank of India is likely to leave its key interest rate unchanged on August 5 and won't ease policy until early next year on fears food inflation will spike if monsoon rains are below average. Nearly all the 43 economists surveyed over the past week expect the RBI to leave its key repo rate on hold at 8 per cent.
Median forecasts show the rate staying unchanged until the end of this year, before being cut to 7.75 per cent in the first quarter of 2015. Between now and mid-2016, the RBI is expected to cut rates by 75 basis points.
Although both wholesale price inflation (WPI) and consumer price inflation (CPI) eased in June, some forecasters warned inadequate rains could lead to higher food inflation. Concerns that India could face its first drought in five years have abated after rainfall increased in mid-July, but the poor start to the monsoon made farmers postpone summer sowing.
"Even though the headline WPI and CPI have eased over the last few months, and the intensity of monsoon rains has picked up after a weak start, rainfall-related concerns persist as a source of risk for the inflation outlook," said Aditi Nayar, senior economist at ICRA.
Three economists expected rates to go up before the end of the year, reflecting those fears. However, growth is slowing and has stayed below 5 percent in the past two years, well below levels needed to create enough jobs for India's young and expanding workforce.
Economists trimmed their growth predictions for the current fiscal year in a Reuters poll last week, despite market expectations that India's first majority government in three decades will quickly bring in reforms and attract more investment. Lack of crucial government reforms, stubbornly high inflation and elevated borrowing costs have weighed on India's economic growth over the past two years and the central bank is struggling to support growth while bringing inflation down to its target.
Still only two forecasters predicted that a cut in the repo rate next week to boost economic growth.
"We believe that reduced monsoon risks, a clear roadmap for fiscal consolidation and moderation in inflation expectations will create a case to begin a rate easing cycle," said Deven R Choksey at KR Choksey. New Finance Minister Arun Jaitley's first budget sought to cap borrowing but left doubts over how the 4.1 per cent fiscal deficit target would be met. The budget also left those who were anticipating radical reforms disappointed, putting the spotlight back on the RBI instead.
The RBI is targeting retail inflation of 6 per cent by January 2016. Inflation, measured by the consumer price index, eased to 7.31 per cent year-on-year in June. Some economists say the target is tough and does not give the central bank room to cut rates.
"The problem is that they have set themselves a very sharp target for inflation reduction and any leeway on that front will be very difficult," said Bhupesh Bameta, economist at Quant Capital.
"It doesn't give them much room to cut rates at this juncture."
