Having cut policy interest rate just three weeks outside the monetary policy review, Reserve Bank of India (RBI) is expected to hold rates steady at sixth bi-monthly monetary policy review later on Tuesday, awaiting for budget cues in order to gauge mainly government’s ability to reduce country’s fiscal deficit, before initiating any further rate cuts.
In a big surprise move, the Reserve Bank of India (RBI) in mid-Jan slashed repo rate by 25 basis points to 7.75%. Consequently, the reverse repo rate under the LAF stood adjusted to 6.75% and the marginal standing facility (MSF) rate, determined at a spread of 100 basis points above repo rate, stood at 8.75%, while bank rate also remained at 8.75%. The RBI move came as inflation has declined significantly over the recent months below the RBI set target of 8% by January 2015.
However, this time around, India’s central bank is unlikely to join central banks across the world in further easing monetary policy. The European Central Bank and counterparts in Canada and Singapore have been among those to loosen policy of late although Japan has put its quantitative and qualitative easing on hold for now over concerns that its currency may plunge too far.
With inflation monster now under its control, RBI, would want to look at the government’s fiscal roadmap and the quality of its fiscal consolidation plan, before losing its monetary policy stance. The plunge in global crude prices and bigger-than-expected falls in domestic vegetable and fruit prices have led to the inflation easing sharply. In a bit of worrying development, India's fiscal deficit crossed the full-year budget estimate at the end of December.
According to the data released by the Controller General (CGA) of Accounts, fiscal deficit at the end of December at Rs 5.32 lakh crore was 100.2% of the budget estimate for the full fiscal year.
