RBI has kept policy rates unchanged for almost 10 months citing high inflation. Despite persistent demand from industry and government for a cut to boost economic activity, the central bank may keep rates on hold, says Morgan Stanley in a note

The Reserve Bank of India (RBI) will announce its bi-monthly monetary policy on 2nd December. There are several voices from India Inc seeking a rate cut from the RBI. Even Finance Minister Arun Jaitley had expressed hope that the RBI will move in the direction of making the cost of capital reasonable to help perk up economy.

“The cost of the capital must be reasonable ... If you are unable to infuse liquidity or unable to provide capital which is cheaper, then even if you have opened out (economy) that itself won’t be enough. So it is a chain of events which has to take place,” he had said.

However, Morgan Stanley, in a note says, it expect the central bank to indicate that inflation will likely transition to the 6% glide path target well ahead of the previously indicated timeline of January 2016. "Although rate action may not be

imminent, we think the key to watch will be the RBI’s language regarding its comfort about achieving its inflation target according to its pre-guided glide path – and in turn, the implications for timing of the first rate cut," it says.

RBI has kept policy rates unchanged for almost 10 months citing high inflation despite persistent demand from industry and government for a cut to boost economic activity. Inflation based on the wholesale price index (WPI) cooled to a 5-year low of 1.77% in October driven by softening prices of fuel and food items. At the same time, retail inflation, based on consumer price index (CPI), also eased to 5.52% at end of October, driven by both lower food and core inflation.

Morgan Stanley said, a part of the deceleration was expected, related to base effect – but the sequential momentum has also moderated sharply. Actual data have surprised positively thanks to faster-than-expected moderation in food inflation and non-food inflation, reflecting the fast pace of deceleration in rural wage growth and commodity prices over the last three months.

Morgan Stanley said, it believes RBI is likely to keep policy rates on hold on 2nd December. "We assign a very low probability to a rate cut in that meeting. However, we believe that key to watch will be the RBI’s language regarding its comfort about achieving its inflation target according to its pre-guided glide path – and in turn, the implications for timing of the first rate cut. Indeed, we expect the RBI to indicate that inflation will likely transition to the 6% glide path target well ahead of the previously indicated timeline of January 2016," it added.