RBI May Hold Rates as Modi Government Eases Inflation Worries

Mangalore Today News Network

New Delhi, June 03, 2014: Reserve Bank of India Governor Raghuram Rajan is expected to keep the country’s key lending rate unchanged and temper his tough rhetoric on inflation in a conciliatory gesture to a new government elected on a platform of reviving economic growth.

All but three of the 52 economists polled last month predicted the RBI would keep India’s policy repo rate on hold at 8 per cent on Tuesday, after last raising interest rates by a quarter percentage point in January.
 
Dr Rajan is already showing some success in bringing down consumer price inflation (CPI) after raising interest rates by a total of 75 basis points (or 0.75 per cent) since September, and analysts widely expect price pressures to keep moderating by early 2015 as the government battles market inefficiencies which raise costs. (Also read: Will Rajan Spring a Surprise Today)

The governor will now have to sell his agenda - which puts priority on the fight against inflation - to India’s new prime minister, Narendra Modi, who many count on to push up the growth rate.

Investors are hopeful the new government will respond to Dr Rajan by tackling the supply-side factors that drive up food inflation in India, thus easing the burden on the poor and restoring investors’ confidence.

"There is a realisation in the new government that high inflation is politically costly, and so they will be willing to walk the extra mile to bring down inflation," said A. Prasanna, economist at ICICI Securities Primary Dealership in Mumbai.

Dr Rajan started toning down some of his anti-inflation rhetoric on expectations of easing retail inflation, which except for an increase in April to 8.59 per cent, has been cooling in 2014. It was nearly 10 percent throughout the two previous years.