The Reserve Bank is unlikely to lower the key rates despite the dramatic fall in retail inflation to under 3 per cent in April but it may highlight the likely risks to the price rise data prints for the second half of the year, said a foreign brokerage today. “We believe that RBI will acknowledge in its June 7 policy meeting that the April retail inflation print was lower than expected, but in the same breath reiterate the risk of higher inflation over the second half of the year,” British brokerage HSBC said in a note.
The key rates will be on hold for “over the foreseeable future”, it added. The risks being seen by the central bank include the El Nino, higher food prices, second round impact of the seventh central pay panel award on housing allowances, one-off impact of GST, fiscal impact of potential farm loan waivers, rising pricing power of producers, global reflation risks and financial market volatility, it said.
Retail inflation rose 2.99 per cent, as against a market estimate of 3.3 per cent, in April on a convergence of local and global factors which included arrival of the winter crops in the market and drop in oil prices. Food inflation more than halved to 1.2 per cent and the moderation was attributed to drop in prices of pulses, fruits, vegetables, oils, sugar and the ‘egg, meat and fish’ category.
It can be noted that the Reserve Bank has been repeatedly citing risks on the price rise front for the second half of FY18. The central bank, which is mandated to get inflation down to 4 per cent with a 2 percentage points leeway on either side, shifted the policy stance to “neutral” after over two years of being in the “accommodative” mode in January, surprising the markets.
However, the possibility of a hike in the key rates is not being discussed at present. “While some sections of the market had started discussing rate hikes, we believe that the RBI is likely to stay on hold over the foreseeable future,” the note said.