RBI unlikely to oblige a rate cut

The Reserve Bank of India's monetary policy committee (MPC) is set to tread cautiously at its meeting this week as the US Federal Reserve prepares to hike interest rates for the third time in the year.

The risks to inflation that refuse to die down on account of erratic food prices, uncertainty over oil prices and the impact of the seventh pay commission would force the MPC to hold rates at its two day bi-monthly meeting on December 5 and 6, experts said.

"We expect the MPC to maintain status quo on the repo rate with a 5-1 vote. While one member will remain hawkish and one will remain dovish and the other four members on the committee will have a neutral stance," C Venkat Nageswar, deputy managing director, global markets, State Bank of India, told DNA Money. Repo rate, the signalling rate at which RBI lends overnight money to banks, is now at 6%.

The GDP growth of 6.3% over the previous year in the second quarter will be another solace for the central bank as it holds back. This was an improvement from the three-year low of 5.7% in the first quarter of the financial year.

"Members are likely to remain concerned about the slower growth, but will point that inflation was moving up and would end the financial year above the 4% target. Lack of certainty about the pay commission costs and state-wise implementation will favour a neutral stance. Two-way movement in yields is expected as a result," Nageswar said.

With much of the revival being led by domestic demand, primarily consumption and investments, the government support has moderated. Despite a modest slowdown in private consumption to 6.5% over the previous year, lower than the 6.7% reported in the preceding quarter, this segment continued to outpace headline growth for the seventh consecutive quarter.

Radhika Rao, economist with DBS, said, "Improvement in GDP was helped by an early festive boost, moderate inflation and easing uncertainty surrounding the goods and services tax. Improving growth prospects cement the likelihood of an on-hold decision from the RBI."

The tax incidence for consumers eased in October and November as tax rates were rationalised.

"We also expect the RBI to hold, but the impact of food prices will be transient," Sugata Bhattacharya, chief economist at Axis Bank, told DNA Money.

Rating agency Icra believes that risks to inflation remain despite MPC forecasting lower readings. Food is a worry as food prices continue to be a worry.

"Although the CPI inflation for October 2017 was lower than the range of 4.2-4.6% for the half year FY2018 that the MPC had forecast in its fourth policy review for FY18, and the recent revision in GST rates would ease price pressures, certain inflation risks persist. With the CPI inflation likely to track a rising trend over H2 FY2018 and print at around 4.5% in March 2018, we expect an extended pause amid non-unanimous voting by the MPC in the December 2017 credit policy," Naresh Takkar, managing director and group CEO, Icra, said.

The CPI inflation in October inched up to 3.6% from 3.3% in July to September and is expected to hit 3.8% to 4% in November.

"In addition, concerns over the inflationary impact of high oil prices, bank recapitalisation, and fiscal slippage risks will also leave the RBI wary of lowering rates further," brokerage UBS said in a report.