After the apex bank, in its bi-monthly policy review held earlier this month, kept policy rates unchanged, global research firm Nomura says that RBI’s key rates are likely to remain unchanged in 2018. The RBI had kept key policy rates unchanged as the central bank’s concerns over inflation rising through the year seem to be coming true. Notably, RBI has raised its expected inflation estimate on the entire band by ten basis points to 4.3%-4.7% in Q3 and Q4 from 4.2% to 4.6% earlier. Retail inflation surged to a 15 month high of 4.88% in November, much higher than RBi’s medium-term target of 4%. Even though RBI retained the key rates, global research firm Credit Suisse had noted that that growth disappointment may warrant one. Further, Credit Suisse had said that it was “less concerned” about the risks cited by RBI, adding that it was optimistic about about RBI’s growth forecast for the rest of Financial Year. We take a look at three reasons why Nomura sees no rate cut in 2018.
The recent spurt in retail inflation to a 15-month high may lead to a long pause in rate cuts, say experts. “Jump in November inflation surpassed even our above consensus forecast, testing past the 4% target for the first time in over a year. This also breaches the RBI’s December revised estimates. Firm inflation and concerns over generalised pressures has shut the door on rate cuts. The jump in Nov inflation reinforces our view that RBI is settling into a long pause. Further increases in inflation and a narrower output gap might prod them to shift to a tightening bias next year,” Radhika Rao, India Economist, DBS Bank said last week. Nomura says that , rising input costs could feed through to higher output prices, fiscal slippage and higher inflation expectations. Against the backdrop of higher-than-expected inflation, slow but recovering growth, our expectations (are those) of a slight fiscal slip in the current financial year (2017-18),” Nomura said.
Rising crude oil prices
Apart from food inflation, fuel prices increased for the sixth month in a row, rising 7.92% in November. “Crude oil prices touched a two-and-a-half-year high in early November on account of the Organisation of the Petroleum Exporting Countries’ (OPEC) efforts to rebalance the market,” RBI observed in its report. Nomura says that there is upside risks to inflation stemming from higher oil prices. Nomura expects that 2017-18 could see fiscal deficit widen (to about 3.5% of GDP as against budget target of 3.2%) on elevated oil prices. , “The combination of higher inflation and flat growth almost rules out any rate cut by the RBI in the next couple of monetary policies,” Jaikishan J Parmar, Research Analyst, Angel Broking said last week.
While many experts and global agencies alike say that the central bank should take a dovish stance to aid growth, Nomura says that the growth recovery could push a few monetary policy committee (MPC) members towards a “tightening bias. Rating agency Fitch had recently said that the central bank had headroom to “keep the policy rate low” to enable a pick-up in the economy, which grew “weaker than expected” in the second quarter. Minutes of the December 6 policy meeting showed that despite upside risks to inflation, most MPC members voted for a pause because of growth concerns, Nomura notes. “At the next policy meeting (on February 7), we expect the same five MPC members to vote to retain the status quo again, but we see a risk that Ravindra Dholakia (lone dove) flips his vote to maintaining the status quo as well because of higher inflation (in November and December),” Nomura said.