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Nachiket Kelkar
Nachiket Kelkar

MONETARY POLICY

Experts rule out further rate cut by RBI as inflation, fiscal worries rise

urjit-patel-rbi RBI Governer Urjit Patel, addressing a press conference to announce the quarterly monetary policy in Mumbai on Wednesday | PTI

The Reserve Bank of India is unlikely to cut interest rates further at least in the current year ending on March 2018, experts said on Wednesday, as the central bank continues to focus on reigning in inflation and it has also flagged concerns whether the government's fiscal deficit will be in check this year.

As was widely expected, RBI left its benchmark repo rate unchanged at 6 per cent. Consequently, the reverse repo rate remains at 5.75 per cent and the marginal standing facility (MSF) and the bank rate will stay at 6.25 per cent.

The RBI had last cut repo rate by 25 basis points (0.25 per cent) in August.

The central bank, meanwhile, slightly raised its consumer price index (CPI) inflation forecast by 10 basis points and now expects it to be in a range between 4.3 per cent to 4.7 per cent in the third and fourth quarter this fiscal year. In the previous bi-monthly monetary policy review, RBI had forecasted inflation in the range of 4.2 per cent to 4.6 per cent.

India's retail inflation rose to a seven-month high of 3.58 per cent in October as food and fuel prices rose.

“The MPC took note of the upside pressure from food and fuel prices on evolving cost of living conditions and inflation expectations. Our surveys indicate that corporates are also contending with rising input cost conditions and higher risks of pass through to retail prices in the near term,” RBI Governor Urjit Patel told reporters after the policy review meeting.

While the seasonal moderation in prices of fruits and vegetables and the reduction in Goods and Services Tax (GST) rates across several goods and services is expected to mitigate some of the inflationary pressures, the monetary policy committee remains concerned that there may be some fiscal slippages in the backdrop of farm loan waivers by states and the tax cuts, which may hurt government revenues.

“Implementation of farm loan waivers by select states, partial roll back of excise duty and VAT in the case of petroleum products, and decrease in revenue on account of reduction in GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation,” RBI said.

The concerns come in the wake of the government's fiscal deficit touching 96 per cent of the full year estimate in seven months ending October. According to official data released last week, India's fiscal deficit stood at Rs 5.25 lakh crore (96 per cent of budget estimate) in April-October, while revenue receipts stood at Rs 7.29 lakh crore (48.1 per cent of the budget estimate). The government has said earlier that it will look to maintain fiscal deficit at 3.2 per cent.

RBI is also watchful of the uncertain pace of monetary policy normalisations in developed markets. The US Federal Reserve is expected to raise interest rates this month. The European Central Bank has also said it will gradually reduce its bond buying programme as it looks to end easy money policy.

Amar Ambani, head of research at IIFL feels that “space for further easing is clearly ruled out” given the fiscal and inflationary risks.

“Rising inflationary pressure, concerns of fiscal slippage and ongoing policy normalisation by global central banks has straitjacketed RBI in terms of rate cut,” he said.

Lakshmi Iyer, chief investment officer (debt) at Kotak Mutual Fund says moving ahead RBI's policy stance will remain largely data dependent and also factor in fiscal outcomes.

“RBI continued with its neutral stance in this monetary policy. While this was in line with our expectation, we believe that the tone has indications of concern with respect to inflation both core and headline. We seem to be headed for a long pause,” said Iyer.

Sonal Varma, chief India economist at Nomura Securities, expects that inflation as well as economic growth is headed higher, and the interest rates are likely to be kept on hold through 2018.

The RBI retained its projection of growth in gross value added (GVA) at 6.7 per cent for the current financial year. It stated that its surveys pointed out that the services and infrastructure sectors were expecting an improvement in demand, financial condition and the overall business situation in the fourth quarter.

“Although there could be some downside risk to the RBI’s FY18 GVA growth projection, we believe that growth is heading higher, supported by ongoing remonetisation, resolution of GST-related issues and large bank recapitalisation,” said Varma.

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