Indian rupee banknotes of various denominations sit in a cash register at the checkout counter of hypermarket. (Photographer: Dhiraj Singh/Bloomberg)

RBI Will Be On A Prolonged Pause On Interest Rates, Says HSBC

The Reserve Bank of India will be on a prolonged pause on interest rates due to rising core inflation and an uncertain fiscal environment, according to HSBC Holdings Plc.

India is in a very difficult period in terms of analysing inflation, said Pranjul Bhandari, chief India economist at HSBC, adding that varied components of inflation are not following a similar direction.

"This is not a very easy decision for the Reserve Bank of India. In our view, we think the RBI will be on a prolonged pause. They will change their [stance from] calibrated tightening to neutral, but we think they won't tinker with rates at this point,” Bhandari said.

The public sector borrowing has increased from financial year 2018 to 2019, Bhandari said, adding that most of it has come from the Food Corporation of India due to a rise in built-up arrears in FY19.

Bhandari pointed that such borrowings could cause a “double whammy for investments in the economy” as they add pressure on bond yields as well as on expenditure that is not capex related.

Other Highlights:

  • 25 basis points cut by RBI in the coming months cannot be ruled out.
  • Bond markets to remain nervous for a while.
  • Says tax assumptions by the government look ambitious
  • Risk of fiscal slippage remains a concern
  • India not in track to meet its fiscal debt target
  • Private capex is not increasing
  • If tax compliance, especially for Goods and Services Tax, picks up, tall targets could be met

Watch the full interaction here: