Prudent Policy Monetary Action; Low Probability of Rate Hike in FY14 - India Ratings

New Delhi, December 18, 2013: India Ratings & Research (Ind-Ra) believes the Reserve Bank of India’s (RBI) monetary policy action of maintaining policy rates will improve both short-term and long-term interest rates. Also, Ind-Ra assigns a low probability to further monetary tightening in FY14.
Contrary to market expectation of a 25bp hike in the policy rate, the RBI, in its mid-quarter monetary policy review, kept the policy rate unchanged.
Ind-Ra believes the correction of flat-to-inverted yield curve will take a while. This is because it depends on a medium-to-long term inflation trajectory, which is trending down mainly due to the negative output gap.
Both the Wholesale Price Index (WPI) and the Consumer Price Inflation (CPI)  are driven by high fruits and vegetable prices. The WPI inflation, excluding fruits and vegetables, has been below 6% since March 2013. Food grain inflation has been falling since June 2013. However, Ind-Ra expects it to stabilise with the arrival of new crops. Although fruits and vegetables inflation was 52.6% in November, retail prices in December 2013 indicate fruits and vegetable inflation has cooled down considerably. Even retail inflation (CPI based), excluding food and fuel, has been hovering around 8% since July 2013.
(Source: Manager – Corporate Communications and Investor Relations, India Ratings & Research  A Fitch Group Company.)