Raghuram Rajan likely to maintain status quo in his last monetary policy review

Reserve Bank of India Governor Raghuram Rajan will announce the last monetary policy as the central bank chair on August 9 (Tuesday).

Rajan has decided to step down as the RBI governor once his three-year term comes to an end on September 4. While the former International Monetary Fund economist has made his decision about returning to academia clear, the government has still not picked his successor. The decision is likely to come only closer to Rajan's exit. 

During his tenure, Rajan has cut rates five times and raised them three times. 

Will Rajan delight markets this time? 

Most brokerages say Rajan will hold rates on August 9 on the back of high inflation fuelled by high vegetable and fruit prices, and the impact of the roll out of the 7th Pay commission.

Both, the wholesale price index-led inflation and the consumer price index-led inflation inched up in May and June, as food prices soared in the economy. Vegetable and fruits and pulse prices have been on the uptick as farm output took a hit due to dismal monsoon last year. This year, the monsoon has been above average so far, but its impact will only be felt later in the year when the first output is reaped. 

"We are expecting that there will be no change in rate because vegetable prices are on the rise... It will take a few months for the vegetable prices to come down when the Kharif crops come into the market," SBI Chairperson Arundhati Bhattacharya said, according to a PTI report, as this ZeeBiz report points out. 

The government also recently accepted all the recommendations made by the 7th Pay Commission panel, which hiked the salaries of nearly one crore government employees. The first pay-out, including the arrears from January, was effected in the July salaries. An outgo of nearly Rs 1.2 trillion from the exchequer, thanks to an upward revision of government employees' salaries is likely to have an impact on inflation in the short-term, which will be taken into consideration by Rajan in RBI's August 9 monetary policy review. 

Swiss financial services major, UBS, called the RBI to factor in higher-than-expected May and June CPI and the impact of partial implementation of the Seventh Pay Commission award, it said recently.

UBS expects RBI to revise its inflation projection higher in the August policy statement. "We expect Rajan to leave policy rates unchanged on August 9, in line with the consensus," UBS said in a research note, adding that "we expect one further 25 bps policy rate cut by the end of calendar year 2016".

Two separate polls conducted by Bloomberg Quint and Reuters, yielded the same results. A majority of the economist and financial experts polled, said that Rajan will likely hold the rates. 

While 88% of the respondents in the BloombergQuint poll said that Rajan will maintain status quo, all but five of the 43 economists polled by Reuters, agreed that the rates will be left unchanged on Tuesday. 

Edelweiss also quoted high headline inflation to say that RBI will maintain a status quo this time. 

There are contrarians, however. Both Bank of America-Merill Lynch (BofA) and a Purchaser's Managers' Index survey said that Rajan may cut rates by 25 basis points (bps) this time. 100 basis points make one percent. 

BofA said, We continue to expect the RBI to cut 25 bps on August 9 if good rains push up pulses cropping and dampen pulses price inflation. As monetary policy should surely be forward looking, we expect the RBI to factor in the fact that a good monsoon would damp pulses prices."

Even the Nikkei India Services Purchasing Managers' Index (PMI) which gauges changes in the activity of the services sector in the country, said that Rajan may cut rates. This is mainly on the back of the services sector data this month, which showed that the sector grew to a three-month high in July.

RBI's monetary policy announcement at 11 am on Tuesday will put the question to rest.