Economists, Brokerages Expect RBI To Hit The Pause Button Next Year
Economists and the industry react to the RBI’s decision to keep benchmark rates unchanged.
The Reserve Bank of India kept benchmark lending rates unchanged while marginally hiking its inflation projection for the year.
The six-member monetary policy committee voted to keep the repo rate at 6 percent and reverse repo rate at 5.75 percent, maintaining its neutral stance which allows room for adjusting rates when needed.
The decision was broadly in-line with market expectations. A Bloomberg News poll of 46 economists had shown that majority expected rates to remain unchanged.
Here’s what economists and brokerages and market experts made of RBI’s December policy review.
‘Hitting The Pause Button’
Upasna Bharadwaj, senior economist at Kotak Mahindra Bank Ltd. expects policy rates to remain on hold, with core inflation likely to average around 4.5 percent in the rest of the year.
While most of RBI policy decisions were in line with the bank’s expectations, Kotak differs marginally on growth forecast. “We expect GVA growth to be lower at 6.5 percent for financial year 2018,” the bank said in a research note.
The RBI is likely to hit the pause button on rates for the rest of the current fiscal as retail inflation is expected to go higher, Bharadwaj wrote. She added that inflation is expected to pick up to around 5 percent in fiscal 2019 "making it less convincing for policy easing in foreseeable future".
Given that MPC members are fixated with anchoring a 4 percent inflation target and the upside risks emanating from higher oil prices, higher rural real wages, sticky core inflation and mean reversion of food prices, we find limited room for any further monetary accommodation this year.Upasna Bharadwaj, Senior Economist at Kotak Mahindra Bank
Bharadwaj added that factors such as possible softening in vegetable inflation and GST rate cuts could translate into lower inflation. She expects gross value added growth to stand at 6.5 percent this year, slightly lower than the RBI’s estimate.
‘Further OMO Sales Unlikely’
The RBI seems comfortable with the liquidity levels and further open market sales are unlikely in the near future, said Sameer Narang, Chief Economist at Bank of Baroda Ltd.
During the RBI’s press conference, Deputy Governor Viral Acharya had said the central bank “will consider open market operations if liquidity is required to be injected or absorbed on a durable basis”. The central banks sees a marginal surplus liquidity is expected till the end of the current fiscal and neutrality will be achieved in the first quarter of fiscal 2019, he had added.
Narang expects the RBI’s neutral stance to continue.
We expect RBI to maintain a neutral stance over the next few quarters even as global central banks raise rates (as was the case with Bank of Korea last week).Sameer Narang, Chief Economist, Bank of Baroda
Growth And Inflation Set To Rise: Nomura
According to Japanese financial major Nomura sees medium term risks to inflation from the “cobweb cycle” of adverse supply response to low food prices in the first half of last year and higher growth in the remaining year.
However, even with growth and inflation headed higher, RBI will maintain rates through 2018, Nomura said.
We believe that both growth and inflation are headed higher, but we expect rates to be on hold through 2018 as the RBI has a sufficient real rate cushion to absorb higher inflation.Nomura Global Markets Research
The bond markets will now closely focus on the fisc and commodity prices with no further rate cuts or open market sales expected, Nomura added.
Clarification On Liquidity Aids Bond Rally
RBI’s clarification that it is willing to conduct open market sales in either direction if the situation so warrants, drove the bond market rally today, wrote SBI chief economist Soumya Kanti Ghosh in a research note.
He said that the recent cancellation of an OMO in November, coupled with today's statement, will “persuade market participants to take serious cognizance of such a signal”, he wrote.
h a verbal clarification of maintaining liquidity is welcome as yield curve in India is largely discontinuous and determined by liquidity and not by inflationary expectatiSoumya Kanti Ghosh, Chief Economist, SBI Research
Ghosh added that the RBI's forecast for inflation is “largely in-sync” with SBI’s estimates.
Tightening Systemic Liquidity
The RBI has taken a ‘cautious approach’ in lieu of continuing inflationary pressures, said George Alexander Muthoot, managing director at Muthoot Finance Ltd.
This approach is more of tightening the systemic liquidity until the inflation rate normalises.George Alexander Muthoot, managing director at Muthoot Finance
RBI Missed The Rate Cut Bus
Tushar Arora, a senior economist at HDFC Bank Ltd. had a contrarion view. The central bank has “missed the bus” on cutting rates, he said.
The right time to cut rates would have been “when inflation was low and there were no upside risks related to vegetable and oil prices,” Arora told BloombergQuint in an interaction. He said that food prices, particularly protein-related items like egg and mutton, shot up in November. “Now it is very difficult to cut rates,” he added.
Here are more reactions from economists on how they are reading the rate cycle in India.