The Reserve Bank of India will hold policy steady at its Oct. 4 meeting, and well past next year, amid weak economic growth and signs inflation may soon overshoot its target, a Reuters poll found. Asia’s third-largest economy started losing momentum after the government scrapped 86 percent of currency in circulation late last year, hurting demand in India’s cash-reliant economy, and the slowdown was compounded by the implementation of a new tax system. In August, despite a neutral policy bias, India’s central bank cut the key policy rate after lowering its economic growth forecast in June to 7.3 percent from 7.4 percent for the current fiscal year.
The latest poll of 60 economists showed although the RBI will hold its key repo rate at a seven-year low of 6 percent next week, it will downgrade its growth forecast again following disruptions caused by the new tax. Introduced July 1, the national tax system caused confusion over product pricing and pushed activity in India’s private sector into contraction. Economic growth slowed to a three-year low last quarter, prompting some economists to lower their outlook. “RBI has already been highlighting downside risks to growth, and that bias should now crystallize in the updated forecasts,” said Abhishek Upadhyay, economist at ICICI Securities PD.
However, lacklustre growth and inflation hovering below the RBI’s 4 percent medium-term target – annual retail inflation was 3.36 percent in August – would not be enough to drive the RBI into action, economists said. Nearly two-thirds of forecasters who answered an extra question said there was a chance consumer inflation would overshoot the RBI’s medium-term target this fiscal year and medians suggest the Bank would hold policy until at least April 2019, the end of the forecast horizon. The reverse repo rate is expected to be left at 5.75 percent across the same period.
However, not all economists are convinced the RBI will keep policy rates unchanged. Credit Agricole CIB, Geojit Financial Services and Trust Capital predict a 25 basis point trim in the repo rate next week. Over a quarter of economists polled expect a cut by year-end. “Growth is below the central bank’s expectations and they will react to that by their easing policy stance as strong annual growth is not achievable after what happened in the first quarter of this fiscal year,” said Darius Kowalczyk, senior economist at Credit Agricole CIB. “So in order to stimulate aggregate demand, they will lower nominal rates and the time to do this is running out as inflation is rebounding.”