RBI seen eas­ing only once this year as in­fla­tion climbs

The Pak Banker - - COMPANIES/BOSS -

The Re­serve Bank of In­dia (RBI) is ex­pected to leave its key in­ter­est rate steady at 6.75 per cent this week and only make one cut this year as ris­ing in­fla­tion ties its hands, ac­cord­ing to a poll. That marks a turn from rapidly cool­ing do­mes­tic con­sumer price in­fla­tion, which al­lowed the RBI to lower the repo rate four times in 2015.

Its last 50-ba­sis-point cut in Septem­ber took mar­kets by sur­prise, but the RBI isn't likely to act as ag­gres­sively in 2016, as a re­newed uptick in food-costs driven in­fla­tion puts the cen­tral bank's medium-term price tar­get at risk. This week's poll of nearly 40 econ­o­mists showed only one 25 ba­sis-point rate cut this cal­en­dar year, be­tween April and June, un­changed from ear­lier ex­pec­ta­tions. The RBI wants an­nual in­fla­tion at 5 per cent by March 2017 but De­cem­ber was the fifth straight month in­fla­tion ticked up, with the rate ris­ing to 5.61 per cent.

"In­fla­tion is likely to ac­cel­er­ate fur­ther," said Shi­lan Shah, econ­o­mist at Cap­i­tal Eco­nom­ics. "Con­tin­ued de­lays to the sow­ing of the rabi (win­ter) crop this sea­son amid un­usu­ally warm tem­per­a­tures are likely to push up food in­fla­tion over the com­ing months."

Econ­o­mists polled ear­lier this month agreed. They fore­cast price rises would av­er­age 5.0 per cent in 2015/2016 and 5.3 per cent in 2016/17. "The RBI faces a chal­lenge meet­ing its medium-term in­fla­tion tar­gets, sug­gest­ing that the win­dow for fur­ther eas­ing has closed," said Mr. Shah. But In­dia's eco­nomic growth has not been as ro­bust as ex­pected and could pres­sure the RBI to ease pol­icy.

The govern­ment re­vised down its growth tar­get for the cur­rent fis­cal year to 7-7.5 per cent and said it was un­likely to be sig­nif­i­cantly greater the fol­low­ing year.

New Delhi is con­sid­er­ing mea­sures such as rais­ing the wages of govern­ment em­ploy­ees by nearly 25 per cent and re­vis­ing bud­get deficit tar­gets to stim­u­late de­mand, both of which could drive in­fla­tion fur­ther be­yond the RBI's tar­get. There are also hopes par­lia­ment will de­liver on long-promised and much-de­layed eco­nomic re­forms to boost growth, in­clud­ing amend­ing the Land Ac­qui­si­tion Bill and in­tro­duc­ing a Goods and Ser­vices Tax.

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