Home / Industry / Banking /  RBI seen keeping repo rates on hold today, citing risks to inflation

Mumbai: The Reserve Bank of India (RBI) is unlikely to cut interest rates, ignoring demands for easing monetary policy after economic growth slowed to the weakest pace in at least three years, as risks of inflation exceeding the central bank’s target remain.

All 15 economists surveyed by Mint expect the central bank’s monetary policy committee (MPC) to keep the key repo rate unchanged at 6% when it announces a decision on Wednesday.

“With core inflation jumping, higher oil prices, and recent weakness in INR (Indian rupee), the MPC will probably watch out how these factors play into the inflation dynamics and then take a call," said Anubhuti Sahay, chief India economist at Standard Chartered Bank.

Since the last policy meeting in August, when RBI slashed the repo rate by 25 basis points, inflation as measured by the consumer price index (CPI) has accelerated sharply. The latest data showed CPI inflation quickened to 3.36% in August on higher food prices and has climbed by 190 basis points in the last two months. Even core inflation, which excludes the volatile component of food and fuel, shot up sharply. A basis point is one-hundredth of a percentage point.

CPI inflation is expected to jump further, keeping RBI cautious about further monetary easing. The central bank has a medium-term target for CPI inflation at 4%.

In its previous policy statement, the MPC had said that if the states choose to raise salary and allowances similar to the central government in the current fiscal year, headline inflation could rise by an additional 100 basis points above the baseline over 18-24 months. It also said that price pressures are building up in vegetables and animal proteins in the near months.

Even as seasonal impact and supply shortages in food inflation subside later this year, headline inflation might settle in the 3.8-4.5% range for the rest of fiscal 2018, according to Radhika Rao, India economist at DBS Bank.

External factors such as unwinding of its $4.5 trillion balance sheet by the US Federal Reserve from October may also keep RBI vigilant, economists said.

On the domestic front, economic growth sagging to 5.7% in the June quarter has sparked debate over the need for fiscal stimulus. Though the government has stuck to its budgeted borrowing target for this fiscal and also committed to meet the fiscal deficit target of 3.2%, it has not ruled out additional borrowing after a review in December.

Economists expect the policy document to flag the issue of stretched government finances as it could be inflationary in nature. RBI governor Urjit Patel warned against farm loan waivers stating that they increase the fiscal risks and pose an upside risk to the inflation outlook.

A rate cut has been suggested to revive sluggish private sector investment. But going by the previous commentary of RBI members of the MPC, the central bank is likely to prefer resolving the twin problems of bad loans and over-leveraged firms to boost capital expenditure and improve monetary policy transmission instead of cutting rates, economists said.

The six-member MPC is expected to give a dovish outlook, acknowledging a slowdown in growth. Economists also expect the central bank to cut its current projection of real gross value added, a measure of growth, of 7.3% for the current fiscal year.

A decision to keep rates on hold may not be unanimous. Ravindra Dholakia, one of the three external members of the MPC, is expected to press for further easing, economists said.

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