Rate cut unlikely as inflation risks remain
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 repurchase 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 that CPI 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, accelerated sharply.
CPI is expected to jump further, keeping the inflation-targeting central bank cautious about further monetary easing. The central bank has a mediumterm target for CPI inflation at 4%. In its previous policy statement, MPC had said that if the states choose to raise salary and allowances similar to the central government in the current fiscal, 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 pro- teins in the near months.
Even as seasonal impact and supply shortages in food inflation subside later this year, headline inflation might settle within 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 the $4.5 trillion balance sheet by US Federal Reserve from October, may also keep the RBI vigilant, economists said.
On the domestic front, economic growth sagging to 5.7% in the June quarter has sparked debate over need for a fiscal stimulus. Though the govern- ment has stuck to its budgeted borrowing target for this year to 31 March and also committed to meet the fiscal deficit target of 3.2%, it has not ruled out additional borrowing post 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 poses an upside risk to the inflation outlook.
A rate cut has been suggested to revive the 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 the over-leveraged corporate sector to boost capital expenditure and improve monetary policy transmission instead of cutting interest 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 financial year.