RBI’s interest rates likely to be divided between neutral and hawkish bias

Published On: 05, Dec 2017 | Source: financialexpress.com

India’s GDP growth has shown signs of recovery last week at 6.3% but it will not have any bearing on the Reserve Bank of India’s monetary policy decision tomorrow. Analysts say higher inflation, which may even breach its 4% target in the next few months, higher oil prices and the impact of the seventh pay commission would make the central bank to keep the repo rate on hold for the second time, and for the third time in February too.

The DBS group expects the RBI to leave policy rates unchanged following this Wednesday’s MPC meeting. “Our focus will be on the tone of the policy guidance, divided between a neutral or a hawkish bias,” the DBS group said in a note.

DBS expects guidance to sound cautious but not outright hawkish. “Markets are currently pricing in 2-3 rate hikes in the year ahead; we, however, don’t believe rate hikes are likely in this timeframe, given our benign inflation forecast,” it added.

The Monetary Policy Committee (MPC), headed by RBI Governor Urjit Patel, will meet on December 5 and 6 for the Fifth Bi-monthly Monetary Policy Statement for 2017-18. The resolution of the MPC will be made public on December 6. The central bank had reduced the benchmark lending rate by 0.25 percentage points to 6% in August, bringing it to a 6-year low, however, kept it unchanged in October.

“We expect the RBI to keep rates on hold this time and in February as well as the inflation is likely to remain high. The crude oil price is also hovering around $63 per barrel; the US oil price is also high,” Madhavi Arora, an economist at Kotak Institutional Equities said, adding that the rebound in the GDP growth will not have any effect on the monetary policy decision.

Global financial services major Nomura, however, said, “We expect a hawkish hold from the RBI..and policy rates to remain unchanged through 2018.” Credit rating firm ICRA has said that the RBI would leave the repo rate unchanged at 6% “in a non-unanimous decision in the December 2017 policy review”.