RBI to keep interest rates unchanged, with inflation under control.

03-04-2017
HT


The Reserve Bank of India (RBI) will keep interest rates unchanged at its meeting on Thursday and as inflation is below target while borrowing costs are more likely to fall than rise, a Reuters poll found.

In February, India’s central bank was expected to cut rates but surprised markets by leaving them on hold and changed its stance to neutral from accommodative, ending its longest easing cycle since the global financial crisis.

The RBI will keep the repo rate at 6.25% on April 6, according to all 60 economists polled, which would mean the Monetary Policy Committee (MPC) has not changed rates at three straight meetings.

While the median consensus was for no change in interest rates until at least 2019, 21 of 34 economists who answered an additional question said the next move by the central bank would be a cut, probably towards the end of this year.

“Current inflation is low, but likely due to temporarily lost consumer demand triggered by demonetization. If inflation declines in a stable and sustainable manner, as we expect, it warrants a rate cut,” said Amy Yuan Zhuang, chief analyst at Nordea Markets.

Defying expectations, India’s economy grew 7% in the October-December period, a tad slower than 7.4% in the previous quarter but much faster than the anticipated 6.4 percent, despite the pain caused by Prime Minister Narendra Modi’s shock crackdown on cash.

Consumer prices rose an annual 3.65% in February, and climbed just 3.17% the previous month - the slowest pace since the government launched the current index series in January 2012.

All six members of the MPC have cited concerns that inflation could quickly accelerate and threaten the central bank’s medium-term target of 4%.

India received average monsoon rains last year and is expected to have a timely arrival of crop-nourishing rains this year, which are critical for India’s farm-dependent $2 trillion economy.

A good monsoon would keep food inflation, usually the most volatile, in check and give the central bank room to cut rates if necessary.

“In case monsoon is normal with reasonable spatial distribution, we believe inflation is going to surprise positively, which will help RBI cut in late Q3 or Q4 2017,” wrote Nikhil Gupta, economist at Motilal Oswal Financial Services.

“However, in case monsoon turns out bad, we don’t expect any rate movement in FY18.”

 

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