The Reserve Bank of India's policy rates are likely to remain unchanged in 2018 despite higher inflation, a recovering growth and elevated oil prices, says a Nomura report.
The Reserve Bank of India’s policy rates are likely to remain unchanged in 2018 despite higher inflation, a recovering growth and elevated oil prices, says a Nomura report. According to the Japanese financial services major, strengthening of the growth recovery could push a few Monetary Policy Committee (MPC) members towards a “tightening bias”. Minutes of the December 6 policy meeting show that despite upside risks to inflation, most MPC members voted for a pause because of growth concerns, Nomura said. RBI yesterday released the minutes of its December meeting. The MPC voted 5-1 in favour of leaving the repo rate unchanged at 6 per cent, with Ravindra Dholakia again dissenting and batting for a 25 bps rate cut.
“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. The central bank, for the second time in a row, did not change the key interest rate (repo), which stands at 6 per cent. “We expect policy rates to remain unchanged in 2018, despite higher inflation, recovering growth and elevated oil prices, mainly due to an ample real rate cushion,” it said. The report further noted that the upside risks to inflation stemming from higher oil prices, 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),” it stated. Nomura expects that 2017-18 could see fiscal deficit widen (to about 3.5 per cent of GDP as against budget target of 3.2 per cent) on elevated oil prices.