RBI to keep rates on hold, sound cautious despite easing inflation

The Reserve Bank of India is expected to keep interest rates on hold on Thursday for the fourth straight meeting but maintain a cautious tone despite a sharper-than-expected pullback in inflation in the last few months.

The Monetary Policy Committee (MPC) is likely to stick with its ‘neutral’ stance and flag uncertainty over the inflation outlook beyond June due to factors such as oil prices and the government’s promise of increasing the minimum purchase price of foodgrains from farmers.

A Reuters poll showed all 61 respondents expected the RBI to keep the repo rate steady at 6.00 percent, its lowest level since November 2010. A majority of the economists polled expect the RBI to only start raising rates in early 2019.

“We expect the policy guidance and tone to be balanced and similar to that in February,” said A. Prasanna, chief economist at ICICI Securities Primary Dealership, referring to the RBI’s projection that inflation will moderate from October onward but with upside risks.

“Accordingly, the MPC will again vote for status quo with a preference to wait for more clarity on key risks.”

Inflation in India unexpectedly eased after vegetable prices crashed in early 2018 due to a surge in harvests, which is expected to keep price pressures soft for the next few months.

However, oil prices remain a risk, with India importing about 80 percent of its crude requirement.

While February’s consumer price index inflation fell to a four-month low of 4.44 percent, and is likely to lag the RBI’s projection of 5.1-5.6 percent for April-September, the central bank is unlikely to lower its guard as it aims to lower inflation to 4 percent in the medium term.

The RBI will also be mindful of the pace of India’s economic recovery as banks are likely to go slow on lending after a loan-fraud scandal worth over $ 2 billion at the country’s second largest state lender Punjab National Bank.

That could slow down activity after India grew the fastest in five quarters at 7.2 percent.

“There can be some dent in the risk appetite among banks to give loans after the issues related to loan fraud were detected, which could add uncertainties to the pace of the near term recovery,” said Siddhartha Sanyal, chief India economist at Barclays in Mumbai.

“We expect that policymakers will be careful of not stifling growth at the early stages of recovery,” adding that he expected the RBI to be on hold for all of 2018.