MPC Likely To Hold Rates Citing Inflation Worries, Says ICRA
RBI likely to hold rates on December policy meeting, says Icra.
The Monetary Policy Committee, which will be meeting next week, is likely to keep repo rates unchanged at 6 percent on inflation concerns, a study by ICRA said.
The retail inflation or consumer price index based-inflation inched up to a seven-month high of 3.58 percent in October from 3.28 percent in September.
The central bank will announce the policy review on December 6 after two days of the Monetary Policy Committe meeting, which begins December 5.
Rating agency ICRA said although the Consumer Price Index inflation for October is lower than the range of 4.2-4.6 percent for the second half of the financial year that the MPC had forecast in its previous review, and the recent revision in Goods and Services Tax rates would ease price pressures, certain inflation risks persist.
With the CPI inflation likely to track a rising trend over the second half and print at around 4.5 percent in March 2018, we expect an extended pause amid non-unanimous voting by the MPC in the December policy review.Naresh Takkar, Managing Director And Chief Executive Officer, ICRA
The agency said based on the expected gradual rise in currency with the public and continued working capital-led uptick in credit off-take, liquidity situation is likely to be close to neutral by mid-Dec. 2017, with sporadic deficits anticipated around the next advance tax payment dates.
The central bank is likely to reiterate its stance of bringing systemic liquidity closer to neutrality on December 6, and primarily use overnight and term repos under the liquidity adjustment facility to manage liquidity in the near term, he said.
Additional open market operations also seem unlikely, given the cancellation of the Open Market Operations sale scheduled for November 23, he noted.
With gross value added growth estimated by the Central Statistics Office at 5.8 percent in the first half of the financial year, a downward bias is likely to be placed on the MPC's baseline forecast for growth of gross value added at basic prices of 6.7 percent for the financial year.
The pace of economic expansion would have to improve sharply to 7.6 percent in the second half to be in line with the MPC's baseline growth forecast of 6.7 percent for the current fiscal, which seems unlikely despite a favourable base effect, ICRA said.
The agency said a broad-based investment recovery is yet to set in, given the challenges faced by the corporate sector, and fiscal concerns at the central and state government level.
Moderate capacity utilisation, high leverage levels, and availability of brownfield distressed assets in some sectors, are likely to constrain fresh corporate investment for a few quarters, the report said.
Uncertainty regarding the buoyancy of indirect tax collections post-GST, and the continued fiscal consolidation forecast by the rolling targets, may limit the fiscal space available with the government to augment infrastructure investment in the near term, ICRA added.