Two key reasons why RBI will not cut interest rates today despite FTP export incentives boost

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Published: December 6, 2017 11:56:03 AM

Reserve Bank of India’s (RBI) monetary policy committee (MPC) may not cut interest rates, holding it at the current seven-year low, despite rising pressure on it to support growth. Here are the two key reasons which may weigh on its decision.

The Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to hold interest rates at the current seven-year low. (Image: PTI)

After the government provided the much needed boost to exporters in the  Foreign Trade Policy mid-term review held yesterday, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) is likely to hold interest rates at the current seven-year low. Aiming to nearly double India’s exports of goods and services to $900 billion by 2020, the government had announced several incentives in the five-year Foreign Trade Policy for exporters and units in the Special Economic Zones in April 2015.

On Monday, global rating agency Fitch 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. “Growth will be very key. What RBI is thinking on growth will be very important,”  Deepali Bhargava, Economist at Credit Suisse told CNBC TV18. The repo rate is likely to remain at 6%, according to 42 of 48 economists in a Bloomberg survey, with the rest seeing a cut to 5.75%. We take a look at two key reasons why RBI is likely to hold interest rates at the current level.

Rising inflation

Analysts say higher inflation would make the central bank to keep the repo rate on hold for the second time in a row. A report by DBS expects guidance to sound cautious but not outright hawkish. “Markets are currently pricing in 2-3 rate hikes in the year ahead; we, however, don’t believe rate hikes are likely in this timeframe, given our benign inflation forecast,” the report said.  Retail food price inflation rose to 1.90 per cent in October from 1.25 per cent in the previous month. “Pressure points for inflation are on the higher side but I don’t expect them to sound very hawkish given the fact that we expect goods and services tax (GST) rate cuts, which have happened and further cuts which may happen to filter in through into consumer price index (CPI) sometime after November,” Deepali Bhargava, Economist at Credit Suisse told CNBC TV18 today.

Rising crude oil prices

Crude oil prices have been on the rise and a stronger than anticipated OPEC-led commitment to extend production cuts will support prices through 2018, says a Goldman Sachs report. In a research note published late Monday, Goldman Sachs lifted its Brent price forecast for next year to $62 a barrel and its WTI projection to $57.50 a barrel. The globally rising crude oil prices may put upward pressure on inflation. As oil prices move up or down, inflation follows in the same direction. “We expect the RBI to keep rates on hold this time and in February as well as the inflation is likely to remain high. The crude oil price is also hovering around $63 per barrel; the US oil price is also high,” Madhavi Arora, an economist at Kotak Institutional Equities said, adding that the rebound in the GDP growth will not have any effect on the monetary policy decision.

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