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, irking Prime Minister Narendra Modi’s advisor Ashima Goyal, according to whom, the predictions are “overestimated”
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”.
However, Ashima Goyal, a member of Prime Minister’s Economic Advisory Council told Bloomberg, that the central bank should cut rates as their inflation predictions have always been overestimated. “Their view of the economy doesn’t seem to be correct, and by keeping rates high they have imposed a high output sacrifice,” Ashima Goyal said. “They believe inflation will rise, but you know their predictions of inflation have always been overestimated.”
India Inc is also demanding interest rate cut to further build on positive sentiment generated by the rebound and upgrade of the country’s sovereign rating by Moody’s. The Consumer Price Index (CPI) for October had accelerated to a seven-month high of 3.5% from a year ago, even as a Reuter poll of 26 economists showed that there are expectations that inflation will breach its 4% target in the next few months.
Reuters poll said that “policymakers have little room for manoeuvre and the outlook for rates beyond the next few months is exceptionally fuzzy”. Meanwhile, the US Federal Reserve is preparing to hike rates for the third time this year.