RBI rate cut? Don’t hold your breath

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Falling crude oil prices and better rainfall in recent weeks may have tempered inflation risks in India, but don't expect the country's central bank to ease monetary policy anytime soon, say economists.

The Reserve Bank of India (RBI) is widely expected to keep its benchmark repo rate unchanged at 8.0 percent when it meets on September 30, according to a Reuters poll.

"We expect rates to be kept unchanged and for RBI to maintain a cautious outlook on inflation despite an expected undershoot in near-term inflation," said Devika Mehndiratta, senior economist, South Asia & ASEAN at ANZ.

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The RBI may find it challenging to bring down the consumer price index (CPI) to 6 percent by January 2016, said Mehndiratta, as faster economic growth could revive price pressures.

Asia's third largest economy grew 5.7 percent on year in the June quarter, its quickest pace in two-and-a-half years. As a result, the central bank is likely to monitor price pressures before committing to easing monetary conditions. ANZ forecasts the first rate cut to be delivered in the second quarter of 2015.

To be sure, while authorities are keeping an eagle eye on prices, data have suggested a mixed inflation picture. India's wholesale price index (WPI) rose 3.74 percent on-year in August, its slowest pace since October 2009, helped by the high base effect of last year and the 15 percent fall in crude oil prices in the past three months.

Meanwhile, consumer price inflation – which the central bank tracks to set policy lending rates – edged down marginally to 7.80 percent, remaining well above the longer-term target.

"The softening WPI inflation points to easing pipeline pressures and are supportive of expectations that CPI should track the gradual disinflationary path here on. (But) unless CPI tapers off towards the target at 6 percent, rate cuts are not in the picture," said Radhika Rao, economist at DBS.

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The RBI's last major policy move was a 25 basis-point rate hike in January to put a stop to rapid price rises. It has raised rates three times in the past 12 months.

Siddhartha Sanyal, economist at Barclays, also expects the RBI to wait until 2015 before lowering rates.

"Recent communication from policy makers suggests that the RBI will likely prefer to keep monetary policy restrictive in the near term to achieve medium-term price stability," he said.

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"Accordingly, while we continue to see merit in a more balanced monetary policy stance, we now expect that lower policy interest rate will only materialize in early 2015, rather than our previous expectation of 2014."

Barclays forecasts a 25 basis point rate cut in both the first and second quarter of next year.