The Reserve Bank is expected to leave key interest rates unchanged in the current financial year despite low inflationary pressures and might go for a cumulative 50 bps rate hike next April, says a Nomura report. According to the Japanese financial services major, headline CPI inflation is expected to remain low in the near term on low food prices. Moreover, core inflation is also expected to stay low on still lingering disinflationary effects of demonetisation and the negative output gap.
However, it said: “We currently expect the RBI to leave rates unchanged through March 2018, which would then be followed by a cumulative 50 bps of rate hikes starting April 2018.” In the monetary policy review yesterday, RBI left key rates unchanged with Governor Urjit Patel noting that the central bank wanted to be more sure that inflation will stay subdued.
Despite inflation moderating sharply in April, the Monetary Policy Committee (MPC) decided to leave policy rate unchanged as a “premature action at this stage risks disruptive policy reversals later and the loss of credibility”. Industry analysts were expecting the MPC to go in for a status quo on the rates, but soften its commentary from the hawkish one, given clarity on various aspects and the cool- down in inflation.
Consumer price inflation rose by just 2.99 per cent in April, the weakest on record.
Nomura further noted that the ongoing remonetisation and easier financial conditions are likely to result in a cyclical growth recovery in the second half of 2017, which in turn will gradually offset the current disinflationary pressure on core inflation.