The Reserve Bank of India’s monetary policy committee is likely to keep the policy repo rate on hold in the upcoming monetary policy review on account of various factors, including likelihood of retail inflation nudging up due to higher prices of vegetables and protein items, rising crude oil prices, risk of fiscal slippage, and possibility of the US Fed upping interest rates.

Out of the four policy reviews in this financial year so far, the central bank has cut the policy repo rate, which is the interest rate at which banks borrow funds from RBI to overcome short-term liquidity mismatches, only once from 6.25 per cent to 6 per cent in August.

In the backdrop of tepid credit offtake and GDP in the second quarter improving to 6.3 per cent from 5.7 per cent in the first quarter, the central bank may prefer to wait longer for the previous rate cuts to work their way through the economy.

Naresh Takkar, MD and Group CEO, ICRA, said: “Although the CPI (retail) inflation for October 2017 (at 3.58 per cent) was lower than the range of 4.2-4.6 per cent for H2 (October-March) FY-18 that the MPC had forecast in its fourth policy review for FY-18, and the recent revision in GST (goods and service tax) rates would ease price pressures, certain inflation risks persist.

Rising inflation

“With CPI inflation likely to track a rising trend over H2FY-18 and print around 4.5 per cent in March 2018, we expect an extended pause amid non-unanimous voting by the monetary policy committee in the December policy review.” Retail inflation quickened to 3.58 per cent in October from 3.28 per cent in the previous month as fuel and light and some food items became more expensive. With receipts lagging behind expenditure, fiscal deficit in the first seven months of FY-18 rose to 96.1 per cent of the full year target, triggering concerns that the government may breach the fiscal deficit target of 3.2 per cent of GDP for FY-18.

Radhika Rao, Economist, DBS, assessed that “the firmer growth report (on GDP) reinforces our expectation that the RBI’s MPC will leave rates on hold on December 6.

“The other economic factors also support an on-hold stance. Since October’s review, CPI inflation is up from July-September’s 3.3 per cent year-on-year to 3.6 per cent in October and likely to quicken towards 3.8-4 per cent in November. Core inflation is even firmer at 4.5-4.6 per cent.”

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

Kotak Securities, in a research report, said as economic growth begins to recover gradually and inflation picks up pace, it expects RBI to maintain status quo in FY-18.

Further, it revised down its FY-18 GVA (gross value added) growth estimate from 6.80 per cent to 6.50 per cent and pencilled in FY-19 GVA growth at 7.1 per cent.

HSBC economists expect the RBI to keep the repo rate on hold in the foreseeable future with the neutral stance unchanged for now, giving primacy to the inflation target.

This is in line with its upward revision of the inflation trajectory in the last policy meeting.

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