Inflation has bottomed out leaving the Reserve Bank of India (RBI) with less room to undertake further rate cuts, India Ratings and Research (Ind-Ra) today said.
“Inflation appears to have bottomed out, however, inflationary expectations have once again shown an uptick,” Ind-Ra said in a statement.
“As per data released by the central bank, mean household inflationary expectations for three months ahead in June 2016 rose by 110 bps to 9.2 per cent from the March 2016 survey,” it added.
The RBI carries out a quarterly survey of about 5,000 households across 16 cities in India to assess inflationary expectations of households — three months ahead and one year ahead.
The rating agency pointed out that though global factors, particularly low interest rates and fund inflows into emerging markets, have remained favourable for a fairly extended period of time, the likelihood of interest rates moving up from here has strengthened — notwithstanding the fact that the US Federal Reserve may still take some time to resume hiking rates.
“With the backdrop of rising global yields, where global sovereign-bond yields have risen to the highest in almost three months, the Indian currency may come under pressure and push the RBI to turn hawkish,” it predicted.
The rating agency said it believes that in such a scenario, companies may lock in their long-term funding at the current rates, before the cycle turns.
Noting that one of the unstated objective of former RBI governor Raghuram Rajan was to maintain real interest rates positive and in the range of 1.5 per cent to 2 per cent, Ind-Ra said it expects the new RBI governor Urjit Patel to also follow this approach.
Real interest rate has remained positive since January 2014. It peaked at 4.91 per cent in November 2014 and has declined since then to 2.06 per cent in August 2016.