Economic growth and inflation are expected to trend higher in the next 6-12 months and the Reserve Bank is likely to stay on a prolonged pause, says a Nomura report.
According to the Japanese financial services major, the MPC minutes suggest low inflation and growth concerns led to policy easing earlier this month, and going ahead the RBI is expected to stay on hold.
Most MPC members voted for a rate cut in August owing to low inflation momentum and signs of weaker growth. However, a neutral policy stance was retained owing to expectations of a higher inflation trajectory in the coming days, the report noted.
According to Nomura, July inflation data confirmed that inflation troughed in June, and going ahead inflation is expected to see an uptrend due to rebound in vegetable prices.
Moreover, GST has also resulted in a slightly faster pace of core inflation momentum.
“Most MPC members highlighted upside risks from the implementation of house rent allowance (HRA) increases, fiscal impulses such as farm loan waivers, proximity to 2019 elections, the recent uptick in inflation expectations, rising vegetable prices and the impact of GST,” Nomura said.
The wholesale inflation rose sharply to 1.88 per cent in July from 0.9 per cent in June 2017, mainly on account of turnaround in the prices of food articles, especially vegetables.
Retail inflation jumped to 2.36 per cent in the month, chiefly driven by hardening of prices of sugar and confectionery items, pan, tobacco and intoxicants.
“In view of the recent data on inflation and the neutral bias of most MPC members, we expect the RBI to stay on hold in October likely with a 5-1 vote,” the report said.
Nomura expects the GST-related activity disruption to also wane, and growth and inflation to trend higher in the next 6-12 months.