Top India forecaster says RBI may refrain from rates cut
mumbai — The most-accurate forecaster for interest rates sees Indian authorities refraining from easing monetary policy on Wednesday, even as the consensus calls for borrowing costs to be cut from a six-year 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 economist at BNP Paribas, ranked No. 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, upcoming tax reform and surging oil and commodity prices,” he said.
As many as 27 of 30 economists in a Bloomberg survey expect the monetary policy panel led by RBI Governor Urjit Patel to lower the benchmark repurchase rate to six per cent from 6.25 per cent, as inflation eases. That’s after authorities left rates unchanged at the December 7 meeting, while saying that the policy stance remains accommodative.
Prime Minister Narendra Modi’s government last week unveiled a budget aimed at boosting growth hurt by its shock November 8 ban on high-denomination currency notes. The administration promised increased infrastructure spending and jobs training, and slashed taxes for most companies. That also reduces the need to stimulate
Recent sharp reductions in interest rates by banks mean that the economy is already being cushioned by easier financial conditions
Mole Hau, economist at BNP Paribas
the economy via rate cuts, according to Hau.
“Recent sharp reductions in interest rates by banks mean that the economy is already being cushioned 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 demonetisation is temporary, which means there’s no need for a big stimulus.”
Citigroup and Capital Economics Ltd are among the other few expecting status quo on rates on 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.
Consumer prices rose 3.41 per cent 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 remains sticky and there are upside risks from oil and commodity prices,” said Samiran Chakraborty, chief India economist at Citi 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