Monetary Policy of June 2: RBI May Cut Interest Rates By 25 Basis Points

Business

oi-Sunil

By Sunil Fernandes

Published: Saturday, May 30, 2015, 8:21 [IST]

The Reserve Bank of India is widely expected to cut interest rates by 25 basis points (o.25 per cent) in its monetary Policy of June 2.

Almost every analyst is expecting a 25 basis points cut in interest rates and it would now be interesting to see the commentary that comes from the country's central bank.

Inflation has fallen sharply in the last few months, thanks to a drop in commodity prices. CPI inflation for the month of April hit a low of 4.86 per cent. This prompted analysts to call for a quick interest rate cut ahead of the policy.

But, the RBI seems to be waiting till June 2, in case there are extraordinary events that unfold. The commentary is expected to be dovish and one would have to wait and see what the indications are on future rate cuts.

The Cash Reserve Ratio is expected to remain unchanged and that has been the case now for several quarters, though it must be admitted that the Reserve Bank of India has a tendency to surprise.

Some analysts even suggest front loading the interest rate and hike the same to 50 basis points as against 25 basis points. But, this would mean an element of risk given the fact that inflation should rear its head again.

Also, several external factors are at play. For example, the RBI would have to consider monsoons which could play truant fuelling food inflation.

On the other hand Greece exit from the euro could lead to exodus of foreign funds from India and hence pressure on the rupee. That would mean increasing inflation, since fuel prices could rise.

All in all, expect a 25 basis cuts points from the RBI. What would be most important is to see the RBI commentary on future rate hikes.

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