Despite slowing growth, the Reserve Bank of India may cite rising pressures on the retail inflation front to hold the repo rate at this week’s monetary policy review.

A majority of the six members of the rate-setting monetary policy committee (MPC) are likely to vote status quo to rein in inflation, which is expected to nudge up going forward, given the lower output of key summer (kharif) crops and rising global crude prices.

The RBI last reduced the repo rate (the interest rate at which banks borrow funds from the RBI to overcome short-term liquidity mismatches) from 6.25 per cent to 6 per cent in the third bi-monthly monetary policy review on August 2.

Growth-inflation story

Emphasising that the central bank is stuck in a conundrum of low growth, mild inflation, saving financialisation and external uncertainties, Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India, observed that this would make things difficult for the RBI on October 4, when the fourth bi-monthly monetary policy will be announced.

“…The obvious question that arises is choosing between the move towards the 4 per cent inflation target swiftly or staying in the inflation band (of +/- 2 per cent around the 4 per cent inflation target).

“In hindsight, if the central bank moves towards the 4 per cent target in January 2018, as was suggested earlier, there would be limited room for rate cut in forthcoming policies…For the record, we expect status quo in the October policy,” said Ghosh.

GDP growth for the first quarter stood at a three-year low of 5.7 per cent, as against 7.9 per cent in the year-ago quarter and 6.1 per cent recorded in the January-March quarter. Retail inflation, as measured by the consumer price index (CPI), rose to its highest measure in the last five months at 3.4 per cent in August 2017, compared with 2.4 per cent recorded in July. The inflation rate however, is still below the RBI’s target of 4 per cent.

Farm output, oil prices

Referring to the first advance estimates for farm output that pegs lower output in rice, maize, soybean, groundnut, tur and moong, Madan Sabnavis, Chief Economist, CARE Ratings, said this would be of concern from the point of view of supplies as well as food inflation. This in turn will have a bearing on policy decisions on interest rates.

Going forward, oil prices are likely to remain under pressure on an expected reduction in global production, he added.

Upside risks to inflation, according to Sabnavis, may emanate from major factors such as lower farm production, changes in tax rates on account of GST, inflation in housing index with the implementation of the 7th Central Pay Commission recommendations, increase in prices of imports on account of the recent rupee depreciation and increasing crude oil prices, and expectation of the Fed increasing rates.

Pointing out that with the weak GDP growth in the June-17 quarter, the debate on providing stimulus to the economy has re-emerged, Morgan Stanley Asia, in a research report, however, said the prospects of a rate cut had been dampened by the August CPI inflation print of 3.4 per cent.

“Indeed, with inflation expected to rise closer toward the RBI’s inflation target, we do not think there is much room to ease monetary policy further,” the report said.

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