RBI unlikely to raise rates despite inflation worries

February 5, 2018

The Reserve Bank of India is likely to keep the repo rate steady in the sixth bi-monthly monetary policy in the backdrop of rising retail inflation even as the underlying policy tone could turn hawkish.

The central bank will be mindful of higher global oil prices, increase in minimum support prices for agricultural commodities (announced in the Budget), and the possibility of fiscal slippage when it takes a call on interest rates on February 7.

In the financial year so far, the RBI has kept the repo rate (the interest rate at which it provides liquidity to banks to help them overcome short-term liquidity mismatches) unchanged four out of five times in the monetary policy review. It cut the rate only once, in August 2017, from 6.25 per cent to 6 per cent.

“I think it should be a neutral stance. There is no reason to increase the rate at this point of time. Actually, the only thing that is disturbing the ecosystem is the (rise in) Government Security (G-Sec) yields,” said Rajkiran Rai G, Managing Director and CEO, Union Bank of India.

The rise in G-Sec yields in the past four months or so is underscored by the fact that the yield on the 10-year benchmark (6.79 per cent) G-Sec maturing in 2027 has increased by 82 basis points since September-end to 7.76 per cent on February 2, 2018. The price of this security has declined by ?5 during this period. Bond yields and their prices are inversely correlated.

Referring to the rise in consumer price index (CPI)-based inflation to 5.2 per cent in December from 4.9 per cent in November, Crisil Ratings observed that the low-base effect, which was behind the acceleration in CPI inflation from July to November 2017, faded away in December.

“Yet, CPI inflation printed at a 17-month high, driven by higher inflation in housing, food (especially vegetables) and personal care and effects — factors that still warrant caution on the part of the Reserve Bank of India,” it noted.

“For fiscal 2018, we maintain the average inflation forecast at 4 per cent. Accordingly, we also expect the Monetary Policy Committee to keep policy rates on hold for the remainder of this fiscal,” said the credit rating agency.

Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said that while the primary concern for the RBI will be the rising inflation trajectory, the February policy meeting will also draw implications from the Budget. “Even as the RBI takes note of the fiscal consolidation and expenditure on roads and railways, it will be cautious on risks of revenue slippages, increase in food subsidy (possibly through higher MSP) and overall expenditure quality, and possible fiscal slippages,” he added.

“Further, higher crude prices and global macro conditions will weigh on the RBI. We expect the RBI to remain on a pause mode. However, the tone will likely be more hawkish with the probability of rate hikes in FY2019 increasing,” said Rakshit.

Taimur Baig, Chief Economist, DBS Bank, in a note, said, “The combination of fiscal challenges and rising oil prices would make the RBI’s policy path a tricky one this year, in our view. Growth has largely bottomed out, but India has yet to benefit from the synchronised pick-up in global demand.”


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