RBI, wary on inflation, set to keep rates on hold

Mumbai: The Reserve Bank of India (RBI) looks set to keep its policy rate on hold on Wednesday, after inflation accelerated to a seven-month high and stronger economic growth reduced the need for monetary stimulus.

All but two of 54 analysts in a Reuters Poll said the repo rate would be left at 6% percent, the lowest since November 2010.

In August, the RBI made its only cut in 2017, of 25 basis points, and in October, it held.

On Wednesday, after a two-day meeting, the RBI is likely to reiterate concern about inflation, as the annual rate increased to 3.58% in October. That’s low by Indian standards, but not far from the central bank’s 4% target.

Another source of RBI discomfort is that core inflation, which excludes food and energy prices, has remained stubbornly high at around 4.5%.

The central bank is likely to reiterate a “neutral” stance, thus giving itself flexibility to cut rates in February, even though only seven of the 48 analysts in the Reuters poll who gave a view on 2018’s first meeting expect that outcome.

Last week, there was welcome news of a recovery in annual economic growth in July-September to 6.3%, from 5.7% the previous quarter.

“The recovery is a source of comfort to the RBI as it lowers pressure on them to take a growth-supportive stance,” said Radhika Rao, an economist at DBS in Singapore.

But the latest pace is still well below the 8% level India needs to create millions of jobs each year for youths.

Calls for a cut

That has sparked renewed calls from some government officials for the RBI, which has cut the repo rate by 200 bps since January 2015, to trim again. While analysts rule out a cut now, some say the central bank could soften its tone somewhat and sound more accommodative.

“We don’t expect the tone to be outright hawkish as the RBI might need to trim down its growth projections for FY18, which at current levels is optimistic,” said Rao, who expects a hold on Wednesday and in February. “But they would still sound cautious on inflation and positive on growth.”

The RBI’s course will likely be determined by inflation, which in October it projected would accelerate to 4.2% to 4.6% in the six months to March, driven by multiple factors including planned pay hikes for government employees.

The central bank is also likely to be concerned that the government may have a wider fiscal deficit in the fiscal year ending in March than the 3.2% target, raising the prospect New Delhi may have to sell more bonds.

Those fears, plus the prospect they would further reduce the scope to cut rates amid accelerating inflation, have sent benchmark 10-year bonds sharply lower since the RBI cut the repo rate on 2 August, with the yield up more than 60 bps.

The uncertainty about India’s fiscal management is being further exacerbated as the government is due to unveil its budget for the next fiscal year in early February, before the RBI’s next meeting. The government’s prudent fiscal management helped the country earn a much-desired rating upgrade from Moody’s Investors Service last month.

Still, some analysts are worried New Delhi could crank up spending next year as it seeks to boost its re-election chances in 2019. Reuters