The Reserve Bank is unlikely to slash key policy rates until the end of this year as inflation shows no signs of moderating while the 7th Pay Commission hike may add to the rise in prices, says a Nomura report.
“With underlying inflation showing no signs of moderating and upside risks from the seventh commission pay hikes in the offing, we expect the RBI to stay on hold until end-2016,” it noted.
The global brokerage firm believes the headline CPI inflation may continue to oscillate around 5 per cent as most of the cyclical factors that drove disinflation like lower oil prices, slowing rural wage growth and weak growth, are largely left behind.
“With the output gap gradually closing and the seventh pay commission pay hikes in the offing, we expect CPI inflation to average 5.4 per cent year-on-year in 2016 as against 4.9 per cent in 2015, assuming full implementation of the seventh pay commission,” the report said.
According to the report, instead of rate cuts, more liquidity provisions will remain the primary channel of policy accommodation for the central bank going forward.
Retail inflation soared to 5.39 per cent in April on higher food prices, reversing a downward trend seen in recent months.
Excluding the direct impact of the seventh pay commission, the CPI inflation is broadly on track to meet the RBI’s 5 per cent target for March 2017, Nomura added.