“The paramount principle is that we have to have an independent central bank that is absolutely top-notch in its professional capability and its abilities to take the right decisions for India with a long-term view”, said one senior government official.
Advertisement
Research firm Moody’s Analytics also said RBI is likely to cut the benchmark rate by 0.25 per cent in the bi-monthly monetary policy review as inflation is likely to remain subdued on the back of average rainfall and lower commodity prices.
Indeed, retail inflation will ease in July and August because of a base effect, but food inflation remains a concern.
In the last monetary policy review, where RBI cut the policy rate by a quarter percentage point to 7.25%, the guidance was neutral-future actions would depend on inflation data, but the market reacted adversely, probably because it was not communicated well.
The United Forum of Reserve Bank Officers Employees had earlier written to MPs and chief ministers of various states that the changes, if implemented, would cripple the functions of the central bank.
The key to timing may lie in the hands of newly appointed external MPC member Gertjan Vlieghe, who is set to replace David Miles from the September meeting onwards.
Hardening of inflation, excluding food and fuel, is most worrisome: RBI.
However, some policymakers might still want to tighten policy if other factors – such as the speed at which wages are rising, relative to a small recovery in productivity – point to underlying price pressures in the slightly longer term.
Now that the Greek crisis is behind us, and given the recent solid economic performance in the UK and hawkish rhetoric from policymakers, we would expect three dissenters to vote for an immediate hike at the August meeting.
The proposal included a plan for a seven-person monetary policy committee similar to the Bank of England’s, except that the majority of its members would be appointed by the central government, not by the bank. Food prices rose in June led by a significant pick-up in prices of pulses, vegetables and eggs. Private-sector economists would usually interpret this as a sign that the bank is unlikely to raise interest rates in the coming months. To revive the economy, the government has loosened its purse strings to boost public spending on infrastructure.
Some economists are starting to fret that ultra-low rates are distorting markets and encouraging consumers to take on too much debt.
With liquidity levels falling to a daily average of $3.2 billion over the past three months (May – July 2015), the MPC agreed to continue with an aggressive programme to absorb excess liquidity and strengthen the impact of higher interest rates throughout the financial system.
The RBI, however, is unhappy that commercial banks have delayed reducing lending rates.
Advertisement
“The next Monetary Policy Announcement is scheduled for September 25th 2015”.
