RBI faces a tough choice on interest rate front on Tuesday :: ET

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With retail inflation showing no signs of abating, RBI faces tough choice on cutting rate second time this fiscal to meet government and industry expectations of lowering cost of borrowing to boost growth.

Most bankers and experts believe the possibility of an interest rate cut by the Reserve Bank on August 4 is very low as retail inflation remains high.

However, India Inc is pitching for a rate cut because of low wholesale inflation and slowdown in industrial growth. Even the government wants the benchmark rate to be cut to prop up growth.

"I am not expecting any rate cut," SBI Chairperson Arundhati Bhattacharya said.

"WPI is (negative) but CPI has gone up a little. Though it is mainly on account of food prices. The RBI has been benchmarking it to the CPI numbers, I think it is unlikely," she added.

While retail inflation in June rose to an eight-month high of 5.4 per cent, the overall Wholesale Price Index (WPI) based inflation was (-)2.4 per cent in the same month.

RBI mostly tracks the consumer price inflation for its monetary policy decision.

"It would be a status quo. I don't think there has been much change in the macroeconomic conditions from the last policy. RBI is closely monitoring monsoon. Nothing indicates that it is a good or a bad monsoon," Bank of Baroda Managing Director and CEO Ranjan Dhawan said.

Some bankers are of the view that there is a scope for further rate cut by RBI, but if it accommodate in this policy is something in the realm of speculation.

HDFC Bank deputy managing director Paresh Sukthankar said: "... it is difficult to hazard a guess on what move the RBI would be taking on Tuesday, but interest rates are on a downward trend. I expect RBI to cut rates by 25-50 basis points this fiscal."

In its last bi-monthly monetary policy review on June 2, RBI cut repo rate 0.25 per cent for the third time this year.

During the calender year, RBI has reduced the rate thrice by 0.75 per cent. It was cut by 0.25 per cent each on March 4 and June 2.

RBI cut the policy rate (the short-term lending rate) from 7.5 per cent to 7.25 per cent in June, but left all other policy tools such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR) unchanged at 4 per cent and 21.5 per cent, respectively.

DBS in a research report said: "The RBI meets next on August 4 and we expect the benchmark repo rate to be held unchanged at 7.25 per cent after cumulative 75 bps cuts since January 2015."

The report said, if the official commentary signals a start to the US rate hiking cycle later this year, "it will affirm our expectations that the RBI will maintain a prolonged pause on the rates front."