With rural wages growth likely stabilising retail inflation around 5.5%, the Reserve Bank of India may keep interest rate steady till 2016-end, research firm Nomura said on Thursday.
Nomura expects rural wage inflation to rise by 6-8% in FY16, which is higher than the second half of 2014. Rural wages rose by 6.8% in January from 5.5% in December and a low of 4.2% in November, the research firm said.
“Stabilisation in rural wage inflation supports our view that much of the CPI disinflation is behind us. While base effects and vegetable/oil-led volatility can cause swings, we believe that underlying inflation is now stabilizing around 5.5%,” Nomura said.
Rural wage inflation appears to be consolidating having fallen through 2014 due to weak demand from the construction sector and higher supply of the labour force, it said.
Rural wages are the primary driver of consumer price inflation (CPI) as much of the CPI basket consists of non-tradables that have rural wages as a key input cost.
India’s CPI inflation rate, which fell to a record low of 4.38% in November, 2014, jumped to 5.37% in February from 5.19% in the previous month, mainly due to higher food prices.
“With growth in the initial stages of a business cycle recovery, and inflation stabilizing, we expect rates to be on hold through 2016,” Nomura said. There is only a 35% chance that the central bank will cut rates by another 25 basis point, it added.
The RBI has already cut interest rate by 50 basis points so far in 2015, to lend a helping hand to a recovery in economic growth on the back of low retail inflation and negative wholesale inflation.
The RBI governor Raghuram Rajan has said that further rate action will be determined by economic data such as the inflation rate.
Recently, the government and the Reserve Bank of India have signed a monetary policy framework agreement that gives mandate to the central bank to tailor its monetary policy to target a retail inflation rate of 4% with a flexibility of +/-2%.