RBI October policy review: Relief for borrowers unlikely

A Rate cut by the Reserve Bank of India now seems more unlikely when Governor D Subbarao releases the half-yearly monetary policy review on October 30.

His tough stance on inflation is likely to prevent him from cutting the repo rate, when headline inflation is at a 10-month high. Subbarao has harped on "the containment of inflation and anchoring of inflation expectations" as his primary objective.

The wholesale price index rose to 7.81 per cent y-o-y in September from 7.55 per cent in August, the rise taking account of the mid-September hike in administered fuel prices. But the trends were already high. July WPI has been scaled up to 7.52 per cent from 6.87 per cent which means the pressures were already there.

The inflation that RBI tracks closely to find out monetary policy is impacting it i.e. core inflation or non-food manufacturing inflation has remained sticky at 5.6 per cent, above the projected medium-term average. A Nomura Financial Advisory says while food inflation has remained tame thus far, it will inch higher in the coming quarter due to the second-round effects of higher diesel prices. In short, don't expect a repo rate cut on October 30.

Rating firm Crisil has also agreed with Nomura. The two relieving elements were the rupee appreciation and reform initiatives from the government. Both improve the level of foreign inflows and relieves some pressure off core inflation.

Monday's inflation numbers indicate RBI is unlikely to let its guard down on containment of price pressures. After the 25 basis points CRR cut in September review, banks led by SBI had slashed their base rate by an equal margin. To keep liquidity soft another CRR cut could happen but borrowers will have to wait more before they can see their loan burden declining.

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