Bankers and other stakeholders are now almost certain that the Reserve Bank of India (RBI) will increase the key policy rate, or the repo rate, by 25 basis points (bps) on Tuesday. But if they are still keenly awaiting the first quarter review of the monetary policy, it’s because of growing expectations that Governor D Subbarao will finally signal an end to the prolonged rate increase season, with core inflation showing signs of stabilising.
The central bank has increased rates 10 times in the last 15 months to arrest the rise in prices. If it does so on Tuesday, it will be the third time in as many months. In May, the policy rate was increased by 50 bps, while in June the quantum was 25 bps.
Economists and market watchers said though the wholesale price index (WPI)-based inflation was still much above the central bank’s comfort zone, non-food manufacturing-based inflation, or the core inflation, was steady in June, with food prices easing.
“We expect RBI to increase rates by 25 bps. There could be a pause after that in case core inflation shows signs of cooling off in the coming months,” said Siddhartha Sanyal, chief India economist, Barclays Capital.
In June, WPI inflation was 9.4 per cent and core inflation was 7.3 per cent, marginally up from the May figure of 7.2 per cent. Food inflation eased. It came down to 7.58 per cent as on July 9 compared to 8.31 per cent a week ago.
Economists say inflation is not likely to increase significantly in the coming months unless global commodity prices, particularly of oil, oilseeds, edible oil, sugar and metals, harden, or the monsoon is a big disappointment.