RBI will Not Cut Rates To­day, Says Top Fore­caster

The Economic Times - - Money -

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 the 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

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