1. Inflation may keep below target but RBI still might not cut rates. Economists explain why

Inflation may keep below target but RBI still might not cut rates. Economists explain why

Inflation is likely to remain lower than the estimate of 4% in the second half of the current fiscal, but the Reserve Bank of India would still not cut rates.

By: | Updated: November 3, 2017 5:56 PM
inflation, wholesale price index, india wholesale market, india economy, india prices, india pulses, india market rate Inflation is likely to register a drop in the second half of the current fiscal, but the Reserve Bank of India would still not cut rates. (Image: Reuters)

Inflation is likely to remain lower than the estimate of 4% in the second half of the current fiscal, but the Reserve Bank of India would still not cut rates. DBS Group economists have said that India’s inflation trajectory, which has surprised India on the downside in the first half of the year, is likely to remain lower in the second half, but the central bank would remain cautious and might keep the rates on hold this year and the next year.

Here’s why DBS group economists Taimur Baig and Gundy Cahyadi think RBI would keep the policy rates unchanged:

The inflation would remain lower in the second half of the year as compared to the first half. The DBS group has cut its CPI inflation estimate from 3.6% year-on-year to 3.2% year-on-year, mainly due to lower food prices. “Food inflation has been subdued thus far on the back of a modest increase in minimum support prices, administrative steps to check on steep increases hoarding, and lower reliance on monsoon,” the economists said.

However, a number of other factors including fuel prices and the recent announcement of bank recapitalisation may offset the inflation, and that’s the DBS group expects the RBI to remain cautious and rates to remain on hold this and next year. However, the DBS group says it also unlikely that RBI will switch to a tightening bias next year as the fiscal push is unlikely to turn extraordinarily populist despite approaching elections.

The impact of the GST changes should begin to wear-off over the next quarter, with the recent move to lower rates for certain categories also contributing to the downdraft. The Reserve Bank of India had kept the repo rate unchanged in the latest monetary policy meeting at 6% given the concerns on the rising headline inflation. The RBI’s 6% repo rate, last revised in August, is lowest in nearly seven years since November 2010.

As five out of six monetary policy members of the Reserve Bank of India voted to keep the repo rate unchanged during its last meeting on October 3-4, Michael Debabrata Patra had suggested that the rate-setting panel should be prepared to increase rates to “quell the underlying drivers of inflation” if they strengthen further.

Earlier, Nomura also suggested that there will not be a cut in the December policy, unless the Q2 growth numbers surprise. Though the economy has bottomed out in the first quarter and retail inflation may stay under 3% in October, since core inflation is likely to be above 4%, we expect the rates to remain unchanged even in the December policy, the brokerage added.

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