RBI may hold rates at policy meet this week

The Reserve Bank of India (RBI) is widely expected to keep rates on hold following the forthcoming monetary policy committee (MPC) meeting on December 6. Many economists believe that rates have bottomed and money markets will move from a liquidity-surplus situation — experienced since demonetisation — to a liquidity-neutral one. The RBI is expected to keep rates on hold because of inflation, which is expected to rise due to higher food prices. Also, stronger growth numbers last week make a case for refraining from a rate cut.

According to DBS Bank economist Radhika Rao, several economic factors support an 'on-hold' stance. "Since October's review, CPI inflation is up from July-September's 3.3% year-on-year (Y-o-Y) to 3.6% in October, and likely to quicken towards 3.8-4% in November. Core inflation is even firmer at 4.5-4.6%. 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," Rao added.

UBS Securities economist Tanvi Gupta Jain said the RBI will not just hold rates in December 2017 but will also go for a prolonged pause in 2018.

"We had expected one last 25bps (100 basis points = 1 percentage point) rate cut from the MPC in February 2018 before a prolonged pause. However, with global crude oil prices hovering at $63 per barrel and the central government likely to miss its FY18 fiscal deficit target of 3.2% of GDP by 30bps, according to our estimate, we believe a rate cut in FY18 now looks difficult," said Jain.

Nomura economist Sonal Varma expects the RBI to hold rates because of improved growth. "We expect the easing GST compliance burden, ongoing remonetisation, bank recapitalisation and a supportive global environment to support a growth recovery ahead. We expect GDP growth to pick up to 6.9% y-o-y in Q4 and average approximately 7.5% in 2018. We expect a hawkish hold from the RBI next week."

The bond market — which provides early signals on interest rates — is already seeing yields rise. This is partly on fears that the government will issue more bonds than expected. The surplus liquidity in the money markets, which pushed bond yields to record lows after demonetisation, is also disappearing. ICRA MD and group CEO Naresh Takkar said, "Based on the expected gradual rise in currency with the public and continued working capital-led up-tick in credit offtake, the liquidity situation is likely to be close to neutral by mid-December 2017, with sporadic deficits anticipated around the next advance tax payment date." #casansaar ( Source - TOI )