RBI likely to hold rates: DBS Bank

The Reserve Bank of India (RBI) is likely to hold its key policy rate unchanged on Wednesday due to near term inflationary pressure arising from higher oil and food prices.

Concerns regarding fiscal slippages and the possibility of further interest rate hike by the US Federal Reserve are also likely to force the Reserve Bank to take a very cautious stance.

“The debate is likely to be over the tone of the policy guidance, divided between a neutral and a hawkish bias. We expect the tone to be cautious, highlighting near-term inflationary risks from higher oil and a pick-up in food prices,” said Radhika Rao, economist at DBS Bank.

With limited headroom for fiscal stimulus, pressure for monetary support is likely to increase.

However the evolving inflation, fiscal and oil dynamics are likely to leave the RBI wary of lowering rates further.

“Global central banks are also mulling over policy normalisation moves, with the US Fed expected to hike rates for a third time this year, in December. Against this backdrop, we expect the RBI to refrain from further rate cuts this week and for rest of FY18,” she added.

The recovery in domestic growth during the second quarter of FY18 and expectation about further recovery in growth is another factor that would go against any cut in interest rate at the moment. This according to market participants would help the RBI to focus on keeping inflationary pressures under check.

“Given inflation risks are tilting to the upside, the RBI will keep the repo rate on hold at 6 per cent in the foreseeable future, giving primacy to the inflation target. Also, embedded in its own forecasts is the view that growth over the second half of FY18 will be more rapid, perhaps above 7 per cent. To that end, the central bank's support to growth via a rate cut at the risk of missing the inflation target may be unwarranted at the moment,” said economists at HSBC Global Research.