RBI is likely to keep Interest Rates on hold for a prolonged period

The Reserve Bank of India (RBI) is likely to keep interest rates on hold for a prolonged period starting with its policy meeting this week on concerns of rising inflation, economists surveyed by Mint said.

All 15 economists surveyed expect the central bank’s monetary policy committee (MPC) to keep the key repo rate—the rate at which it infuses liquidity in the banking system—unchanged at 6% when it announces its decision on Wednesday.

“We are expecting a prolonged pause at this point of time because inflation is expected to trend higher and crude oil prices have further increased the upside risk. Additionally, given the fact that the economy is seeing a cyclical recovery in growth, RBI would rather wait and watch on how these factors play out before moving rates in either direction,” said Upasna Bhardwaj, vice-president and senior economist at Kotak Mahindra Bank.

Since the last policy in early October, inflation as measured by the Consumer Price Index has accelerated, inching closer to the 4% mark, which is the central bank’s medium-term target.

The most recent inflation print in October saw headline retail inflation rising to 3.58%, the fastest pace in seven months, because of rising food and fuel prices.

The prices of India’s crude oil basket rose to $61.60 per barrel at the end of November from $55.36 per barrel at the start of October, due to rising global crude oil prices.

Rising international crude prices do not bode well for inflation in net oil importer countries such as India.

Most economists expect CPI inflation to trend close to or above 4% in the coming months. RBI expects inflation to be in the range of 4.2-4.6% in the second half of the current fiscal year.

“In addition, concerns over the inflationary impact of high oil prices, bank recapitalization, and fiscal slippage risks will also leave the RBI wary of lowering rates further.

Global central banks are, meanwhile, mulling over policy normalization moves, with the US Federal Reserve expected to hike rates for a third time this year, in December.

Against this backdrop, we expect the RBI to refrain from further rate cuts this week and for rest of FY18,” said Radhika Rao, India economist at DBS Bank.

The recent growth numbers, which pointed out recovery, had also strengthened case for status quo.

After five consecutive quarters of deceleration, GDP growth quickened to 6.3% in July-September, suggesting the Indian economy had shaken off some of the lingering effects of demonetization and the Goods and Service Tax, which was rolled out on 1 July.

GDP growth had slumped to a three-year low of 5.7% in the June quarter.

The minutes of the MPC’s October meeting showed that one member, RBI executive director Michael Patra, called for the rate-setting panel to be prepared to raise rates in the coming months should inflation pressures harden.

“I… vote for status quo, but only as long as inflation readings stay within the target of 4%. It is time to be in readiness to raise the policy rate to quell the underlying drivers of inflation if they strengthen further,” Patra had said.

However, most economists don’t expect the RBI to raise rates in this meeting as a precautionary measure because it could hamper the ongoing economic recovery.

Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, said the RBI will try to give a neutral perspective because the recovery in growth was still at a nascent stage.

Economists expect RBI to acknowledge the recovery. However, it is also to likely to emphasize the need to resolve the banking sector’s stressed assets and improve credit growth in order to achieve sustained and higher economic growth.

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