Raghuram Rajan may stand pat on rates despite pressure building up for a cut

Reserve Bank of  India (RBI) Governor Raghuram Rajan is widely expected to keep the repo rate, the central bank's main policy rate, steady at 8 per cent in the bi-monthly review of monetary policy on Tuesday, December 2.

"There must be some predictability in monetary policy. That is what the RBI is trying to achieve by waiting for a more sustained fall in inflation," says Romesh Sobti, Managing Director and CEO of IndusInd Bank. Sobti, however, adds that bankers would like to be pleasantly surprised.

The RBI, under the celebrated economist Rajan, is waiting for the consumer price index, or retail inflation, to ease below its targeted levels. A low and stable inflation is a perquisite for long-term sustainable growth. The RBI had earlier set a CPI target of 8 per cent till January 2015 and 6 per cent for January 2016.

The CPI has been easing for the past few months. The price index was at 5.52 per cent in October from 6.46 per cent in September. The biggest worry is on food inflation, which has a share of almost half in the CPI basket. Concerns of rising food inflation have been built into the RBI's model of inflation prediction, which is at 7 per cent by the fourth quarter of 2015/16. This predicted level is much higher than the target of 6 per cent by January 2016.

While crude oil prices have been falling, the rupee has slightly depreciated in the past two months. The local currency has slipped to 62 levels against the US dollar because of concerns of higher fiscal deficit and as the greenback broadly strengthens. The US has already withdrawn the  bond buying programme under quantitative easing to pump money into its economy. The indications are that the US economy will soon hit the growth path, which could shift dollars back from emerging markets to the US. This means some pressure on currencies in emerging markets including India.

Many bankers say there will be pressure on the RBI to reduce interest rates as there has been a steady fall in growth. As per latest data, economic growth fell to 5.3 per cent in July-September as compared to 5.7 per cent in the April-June quarter of the current fiscal year. The economy expanded at less than five per cent in the past two fiscal years. The corporate sector, especially over-leveraged companies, are suffering because of high interest rates.

There are some who say the pressure would mount on Rajan from the external members of the RBI's technical  advisory committee that suggests what action the central bank should take. In the September policy review, four of seven members voted for a rate cut, which Rajan overruled. This time, there are expectations of more members joining the chorus for a rate cut.