The Telegraph
Monday , June 2 , 2014
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Focus on RBI policy tone

Mumbai, June 1: The Reserve Bank of India’s (RBI) monetary policy review on Tuesday will be keenly watched not so much for the rates but for the tone and the tenor.

Senior bankers and bond market circles expect the RBI to keep key policy rates unchanged as the threat of inflation remains even as industrial output contracted 0.5 per cent in March and the domestic economy grew less than five per cent in 2013-14 for the second consecutive fiscal.

After Raghuram Rajan took over as the RBI governor in September last year, the central bank has not only hiked interest rates thrice but also changed its policy benchmark to track retail inflation instead of wholesale price data. Many experts feel this stance will keep interest rates at an elevated level, at least till the end of this calendar year.

“Even as these changes have taken place, a major event has now occurred in the form of change of guard at the Centre. We have a Prime Minister who has a pro-growth image. This makes the tone of the monetary policy very interesting as not only the banking community, but also the government will be looking at what indications the governor gives with regard to the interest rate trajectory,” says a chief of a PSU bank.

The banker pointed out that it was too early to talk about differences emerging between the government and the RBI over the monetary policy though there have been instances in the past, particularly during Duvvuri Subbarao’s tenure.

Rupa Rege Nitsure, chief economist at Bank of Baroda, told The Telegraph that while the RBI was likely to go for a status-quo on the repo rate, its tone could be hawkish as worries on the inflation front remained.

It is feared that food inflation may rise because of a poor monsoon this year. The India Meteorological Department has said the country may get below-normal monsoons.

Nitsure, however, is optimistic that the new government and the RBI will work in tandem. “It (the government) has given positive signals that there will be co-ordination between the monetary and fiscal policy.”

According to Nitsure, the RBI will make room if the government takes actions to remove supply side constraints.