Inflation is high; RBI may not cut rates

Amid the backdrop of high inflation, the Reserve Bank of India may not cut interest rates in its month-end policy review to boost industrial growth which slipped to 2.4 per cent in May, say experts.

"I do not think there will be either infusion of liquidity or cut in policy rates by the RBI in its quarterly policy review," HDFC Bank chief economist Abheek Barua said.

The index of industrial production -- gauge of industrial activity in terms of production -- showed a 2.4 per cent growth in May, down from 6.2 per cent a year ago.

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Although the industry has been pitching for cut in interest rates by the RBI in its policy review on July 31, the experts are of the view that the central bank may continue with the status quo stance in view of inflation which is still much above the comfort level of 4-5 per cent.

While the wholesale price-based inflation was 7.55 per cent in May, the retail inflation for the month was at 10.36 per cent.

Crisil chief economist Deepak Joshi said, "Monetary policy is not going to be changed. I think RBI will keep it on hold. Going by the assessment of the economy, I think there will not be any rate cut."

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HSBC Global Research said though IIP picked up on an improved sequential momentum and last year's low base, inflation is still high.

"Growth remains moderate and will remain constrained going ahead, but high inflation and the structural nature of the slowdown limits the scope for RBI to move," it added.

Meanwhile, voicing concerns of industry, Commerce and Industry Minister Anand Sharma said on Thursday, "We will urge the RBI to revisit this issue (interest rates) to ensure that capital is available to the industry. . . given the slowdown there is every justification to ensure that Indian industry remains competitive and the manufacturing grow."

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Industry body PHD Chamber said the RBI should focus on re-capturing growth.

"We are anticipating a cut in the repo rate by 50 basis points (0.5 per cent) on July 31, while a total cut of 200 basis points (2 per cent) by December 2012," PHD Chamber chief economist S P Sharma said.

Citi Research, a division of Citigroup Global Markets, however, said monetary easing by the RBI in the immediate term is unlikely because of its stance on inflation.

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However, it expects 0.5 per cent to 0.75 per cent rate cut for the full year.

Ratings firm ICRA said the inflationary concerns are likely to dominate monetary policy in the near term.

"With a low probability of any meaningful easing of retail or wholesale inflation in the forthcoming data for June 2012, the RBI may maintain policy rates at current levels in the first quarter policy review," it said.