RBI will Not Cut Rates Today, Says Top Forecaster
The most-accurate forecaster for interest rates sees the Reserve Bank of India refraining from easing monetary policy on Wednesday, even as the consensus calls for borrowing costs to be cut from a sixyear low.
A rate reduction wouldn’t serve the oil-importing nation well when rising commodity prices risk stoking inflation and uncertainty around US policies threatens to unsettle the rupee’s calm, according to Mole Hau, a Hong Kong-based economistatBNPParibasSA,rankedNo 1 by Bloomberg for predicting the Reserve Bank of India’s rate actions over two years.
Foreign holdings of rupee-denominated bonds have fallen at the fastest pace since 2013, as the rate differential between India and the US narrowed.
“It would be helpful to stay pat for the economy and the rupee,” said Hau. There are rising “upside risks to inflation from higher housing allowances,upcomingtaxreformand surging oil and commodity prices,” he said.
Asmanyas30of 33economistsina Bloomberg survey expect the monetary policy panel led by RBI Governor Urjit Patel to lower the benchmark repurchase rate to 6% from6.25%,asinflationeases.That’s after authorities left rates unchangedattheDecember7meeting, while saying that the policy stance remains accommodative.
Prime Minister Narendra Modi’s government last week unveiled a budget aimed at boosting growth hurtbyitsshockNovember8banon high-denomination currency notes. The administration promised increased infrastructure spending and jobs training, and slashed taxes for most companies. That also reducestheneedtostimulatetheeconomy via rate cuts, according to Hau.
“Recent sharp reductions in interest rates by banks mean that the economyisalreadybeingcushioned by easier financial conditions,” said Hau. “The extra fiscal impulse from the budget, at least relative to expectations, if any, is very modest, but is consistent with the Finance Minister’s statement that growth is likely to be higher in fiscal 2018 and the impact of demonetization is temporary, which means there’s no need for a big stimulus.” Citig roup Inc. and Capital EconomicsLtd.areamongtheother few expecting status quo on rates Wednesday.
Foreign holdings of rupee-denominated government and corporate bonds fell in each of the last four months, the longest stretch since 2013. The hoard declined by 390.8 billion rupees ($5.8 billion) in the period, as theÂ yield differential between India and the US narrowed.
The yield on benchmark 10-year bonds rose one basis point to 6.42% Tuesday. The rupee weakened 0.2% 67.3675 per dollar, snapping nine days of gains. Consumer prices rose 3.41% in December from a year earlier, the slowest pace since November 2014.
“It would be wise to stay pat at this juncture given that core inflation remainsstickyandthereareupside risks from oil and commodity prices,” said Samiran Chakraborty, chief India economist at Citigroup Inc. in Mumbai. “Other factors that will guide the RBI’s hand would be increasing external sector vulnerability on account of higher Fed rates and emerging fears of protectionist policies.” — Bloomberg