Consumer inflation may see an uptick at 5.5-6 per cent in the fourth quarter of 2017 as a result of fading demonetisation impact, while rising exports are likely to aid economic recovery, says a Nomura report. Besides, one-off risk to inflation also emanate from the implementation of GST and house rent allowance increases for government employees, the Japanese brokerage firm said.
“… as the year progresses, we expect inflation to rise to 5.5-6 per cent in the fourth quarter of 2017 and first half of 2018, on fading transitory factors (demonetisation and pulses deflation), rising cyclical drivers (narrowing output gap, higher rural wage growth) and adverse base effects,” Nomura said in a research note.
According to official figures, retail inflation jumped to a five-month high of 3.81 per cent in March, while inflation at the wholesale level eased to 5.7 per cent in March. For 2017-18, the RBI projected retail inflation to average 4.5 per cent in the first half and 5 per cent in the second half.
The Reserve Bank frames its monetary policy on the basis of retail inflation.
The Nomura RBI Policy Signal Index (NRPSI), which measures the likelihood of monetary easing versus tightening in the near term, stood at 0 in April suggesting a neutral policy stance in the near term. “We expect policy rates to remain on hold in 2017, but given our expectation of higher inflation of 5.5-6 per cent by the fourth quarter of 2017, we expect the RBI to hike by a cumulative 50 bps in 2018,” it added.
Earlier this month, the Reserve Bank had left key policy rate unchanged at 6.25 per cent for the third review in a row citing upside risks to inflation. It had, however, increased the reverse repo rate — which it pays to banks for parking funds with it — by 0.25 per cent to 6 per cent, narrowing the policy rate corridor.