The Reserve Bank of India is likely to hold rates once again during the upcoming monetary policy announcement on Wednesday, a poll of 10 economists showed.
Despite the fall in gross domestic product (GDP) growth in the January-March quarter, economists believe that the central bank would wait to see more macroeconomic data and developments on inflation over the next few months.
While all 10 economists agreed that the regulator would maintain its ‘neutral’ stance, they also expect it to change its outlook on inflation for the rest of the year.
“We expect the RBI to acknowledge in the upcoming June 7 policy meeting that current pressures on inflation are turning out to be lower than expected,” Pranjul Bhandari, chief India economist, HSBC Securities and Capital Markets Pvt. Ltd., said in a report last week.
While announcing the rates in April, the monetary policy committee (MPC) had said there were elevated risks to inflation going ahead due to the goods and services tax (GST), El Nino, seventh pay commission and other geopolitical risks. Moreover, respondents to an RBI survey also expected inflation to rise further. This even led RBI executive director and a member of the MPC, Michael Patra, to suggest a rate hike of 25 basis points (even though he eventually voted for no rate action in the April policy).
The RBI then announced an increase of 25 basis points (bps) in the reverse repo rate, while keeping the repo rate stable. The hike in reverse repo rate was intended to prevent short-term interest rates from falling far below the policy rate due to excess liquidity conditions.
“However, from the inflation numbers and CSO (central statistics office) data it can be seen that growth has been on the declining trend every quarter in FY17. Additionally, inflation risks are now mostly balanced to the downside,” Soumya Kanti Ghosh, chief economic adviser, State Bank of India (SBI), said in a report on Thursday.
April saw price pressures cool off significantly, with both consumer (CPI) and wholesale price inflation (WPI) showing a sharp downward trend.
CPI fell to 2.99 percent in April compared to 3.89 percent in March, while WPI moderated to 3.85 percent from 5.29 percent a month ago. Economists largely expect the upside risk on inflation to subside, as a normal monsoon, softening commodity prices and temporary effects of GST implementation pass.
Another area where the RBI’s commentary will be closely tracked is the central bank’s growth expectations. Last week, government data showed that the GDP grew 6.1 percent in the January-March quarter of financial year 2016-17, while the full-year growth was at 7.1 percent.
The drop in growth was largely due to the effects of demonetisation of large-value currency notes in November and December 2016. It would be important to note the RBI’s view on the growth numbers and whether the impact of demonetisation is transitory.
“How the MPC interprets the growth revisions will have crucial implications for how much confidence the committee has on its projected growth acceleration in 2017 -18 (from 6.7 percent to 7.4 percent), and therefore ultimately on its assessment of future output gaps and core inflation,” Sajjid Chinoy, economist at JPMorgan, said in a note on Thursday.