RBI seen maintaining rates as inflation eases
CLOSE WATCH Central bank to keep an eye on oil price, MSP for farm products MUMBAI:
The Reserve Bank of India will keep interest rates unchanged in the first monetary policy review for the current fiscal year, amid a gradual recovery in growth and easing inflation, according to a Mint survey.
The central bank will, however, keep a close watch on increased risks to inflation posed by rising oil prices and higher minimum support prices for farm products, according to the 15 economists surveyed by Mint. RBI’s monetary policy committee will meet on 4-5 April.
“We expect the RBI MPC to vote to keep rates steady. The backdrop of a gradual improvement in growth yet easing inflation is likely to keep the central bank cautious, but it will be in no hurry to tighten policy. In this regard, the RBI faces less pressure to shift gears to a hawkish stance at the upcoming April review, with a similar tone to extend into June as well,” said Radhika Rao, economist at DBS Bank.
The consumer price index (CPI)-based inflation in February slowed to 4.4%, below the RBI’s March projection of 5.1%. In the February meeting, all members of RBI’s rate setting panel had voted for a pause in the monetary policy with the exception of RBI executive director Michael Patra who voted for a 25 basis points hike. In the last MPC minutes, he had indicated that in the near-term, inflation is likely to drift well above target of 4% +/- 2% and the expected easing of inflation in H2 FY19 is largely statistical as the house rent allowance effect wanes.
“We expect the Reserve Bank of India (RBI) to acknowledge that inflation will undershoot its 5.1% projection for Q1 2018, but retain its forecast of 5.1-5.6% in H1 and 4.5-4.6% in H2 FY19 with upside risks. GVA growth projection will likely be left unchanged at 7.2% in FY19 with balanced risks (from 6.6% in FY18),” said Sonal Varma, managing director and chief India economist at Nomura.
Since the last monetary policy meeting in February, inflation has eased on account of softening prices of vegetable and pulses. CPI print for March is also expected to dip further. However, the inflation trajectory is likely to change with June print seeing peaking because of base effect.
In the previous policy, the MPC noted that the inflation outlook is clouded by several uncertainties on the upside. This includes staggered impact of HRA increases by various state governments, recovering global growth exerting further pressure on crude oil and commodity prices with implications for domestic inflation, budget announcement on MSP, increase in custom duty as proposed in budget, and impact of fiscal slippage. It had also said that vigilance is also required on the external front given the normalisation of monetary policy by major advance economies.
The committee had also listed mitigating factors such as subdued capacity utilisation, movement of oil prices on either side, and moderation in real rural wages.
Economists noted that since the last policy, the view on evolving inflation trajectory has not changed and hence a status quo is warranted especially given that the growth is reviving.
Since the last policy, the only upward risk to inflation that has played out is higher oil prices. Actual prints have been lower than RBI’s trajectory. Right now there are quite a few uncertainties on inflation and growth trajectory which warrant careful assessment. While there is definite risk emanating out of the higher support prices for farm products, exports may be impacted by current protectionist measures seen across the world,” said Sameer Narang, chief economist at Bank of Baroda.