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Report dashes rate cut hopes

Mumbai, Jan 22: The Urjit Patel committee’s recommendation to base monetary policy decisions on consumer price inflation has scuppered all hopes of interest rate cuts this year.

Experts fear that if the Patel report’s suggestions are accepted, the RBI will adopt a hawkish stance and there will be no further change in the policy-signalling repo rate, which is now at 7.75 per cent.

The much-awaited report of the expert committee to “Revise and Strengthen the Monetary Policy Framework” was released on Tuesday. It suggested that while the headline consumer price inflation (CPI) should be the nominal anchor for policy communication, there should be a longer-term target of 4 per cent for CPI inflation with a band of +/- 2 per cent.

Given the current elevated level of CPI inflation, it recommended a 12-month target of 8 per cent and 24-month target of 6 per cent, before the inflation target is formally adopted.

It is this recommendation that has forced the markets and experts to revise their forecasts.

“If the RBI governor accepts the recommendations and commits to the timeline for the headline CPI reductions (8 per cent from around 10 per cent over next 12 months), it is very unlikely that the RBI will cut the repo rate now. Our estimates indicate that with unchanged policy rate, CPI inflation is likely to be around 7.5 per cent (March 2015), implying that the RBI could be patient,” said Indranil Pan, chief economist at Kotak Mahindra Bank.

Crisil said interest rates would remain firm if the panel’s suggestions were accepted. “If the RBI accepts the recommendations of the Urjit Patel committee, interest rates are unlikely to come down in 2014-15,” the rating agency said in its “India Economic Forecast” report.

The worry was not lost on the bond markets either. Earlier in the day, government security prices came under pressure on worries that interest rates are unlikely to fall if the recommendations are accepted. Yields (which are inversely related to prices) on the benchmark 10-year security ended at 8.60 per cent from the previous close of 8.55 per cent.

The RBI is set to announce the third-quarter review of the monetary policy on January 28 where it is largely expected to keep key rates unchanged in the policy. Governor Raghuram Rajan is also expected to indicate the central bank’s stance with respect to the recommendations made by the committee.

Recently, the wholesale price index (WPI) inflation came down to a five-month low of 6.16 per cent. Similarly, the CPI inflation declined to 9.87 per cent in December 2013 from 11.16 per cent in the previous month. These numbers had generated optimism in some circles that if inflation continued to fall on a sustained basis, the central bank might cut interest rates later this year.

 
 
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