Reserve Bank of India's Monetary Policy Committee might keep interest rates on hold when it meets on 5-6 December for the fifth bi-monthly policy review. After rating agency Moody's upgraded India's sovereign ratinngs, it had given hopes to many that RBI might soften its stand now. However, rising crude prices and inflation fears have dashed such hopes.
Retail inflation accelerated to 3.58 per cent in October on the back of rising food and fuel prices. Experts therefore feel that RBI might not bite the bullet. The lowering of GST slabs might have helped offset some inflationary impact but worries on inflation in commodities and food prices remain.
"Although the CPI inflation for October 2017 was lower than the range of 4.2-4.6 per cent for H2 FY2018 that the MPC had forecast in its Fourth Policy Review for FY2018, and the recent revision in GST rates would ease price pressures, certain inflation risks persist,” said Naresh Takkar, Managing Director and Group CEO, ICRA.
ICRA anticipates that the Monetary Policy Committee (MPC) would leave the repo rate unchanged at 6.0 per cent, given the expectations of a further rise in CPI inflation in coming months. It expects inflationary pressures to also come from state's pay revision. "We see an extended pause on rates for this fiscal,” said Takkar.
The pace of economic expansion would have to improve sharply to 7.6 per cent in the second half of FY 2018 to be in line with the MPC's baseline growth forecast of 6.7 per cent for the current fiscal, which seems unlikely despite a favourable base effect, it said.
The agency said a broad-based investment recovery is yet to set in, given the challenges faced by the corporate sector, and fiscal concerns at the central and state government level.
Madan Sabnavis of CARE Ratings also had similar views. "With oil moving above $60, it is widely expected that crude will inch up further, adding to inflationary concerns. Moreover, Federal Reserve is going to increase rates. That will lead to FII outflow putting pressure on the rupee,” said Sabnavis.
