Reserve Bank of India Governor Y Venugopal Reddy is likely to maintain the status quo on interest rates when he unveils the central bank's annual policy statement next week, on May 18. In his first policy announcement in November last year, Reddy had left interest rates untouched.
The benchmark bank rate was last changed in April 2003, when the then governor Bimal Jalan reduced it from 6.25 per cent to 6 per cent. The short-term repo rate, too, was last changed by Jalan before he stepped down from office, from 5 per cent to 4.5 per cent on August 25 last year.
Globally, interest rates have started moving northwards. The US Federal Reserve has hinted at a rate hike as the signs of an economic recovery are distinct now.
The Fed discount rate is now pegged at a four-decade low of 1 per cent. The Bank of England raised its rate to 4.25 per cent in two stages (25 basis points each in February and May). The central banks of Australia and New Zealand, too, have increased their rates.
However, the RBI is unlikely to tinker with rates at a point when a new government is taking over at the Centre. In a way, the RBI document will be the new government's first policy statement and so the RBI is likely to wait for some time to take a firm view on a rate hike. The possibility of a rate cut, however, is ruled out.
Normally an April affair, the semi-annual ritual this time has been shifted to May as the RBI wanted to announce its policy after the elections.
However, if a clear picture does not emerge about the formation of a government by the weekend, the RBI may not be in a position to incorporate the government's inputs in the policy document.
The central bank may project a gross domestic product growth of around 6.5 per cent with an upward bias for 2004-2005. Last year, it initially projected a 6 per cent growth rate but later raised it by one percentage point.
Even though the economy is expected to do well, on a higher base it is unlikely to do an encore this year, senior economists say. Much will depend on the monsoons.
The inflation rate projection in the policy statement could be around 5 per cent. Last year, it was 4-4.5 per cent but the actual rate of inflation was higher by the year end.
