India Update: RBI To Stay On Hold

RBI Expected To Hold Amid Price Stability Concerns

Concerns about price stability are likely to return to the forefront for India’s Reserve Bank, with the government planning fiscal stimulus. Import price pressures have also likely increased, given the weakening Indian rupee (IND), which should keep the Reserve Bank of India (RBI) cautious at its October 4 meeting—we expect it to keep the reverse repo rate at 6.00%

Recent reports suggest the government is discussing a stimulus to boost economic growth, although no decision seems to have been taken so far. “With both tax and non-tax revenue falling short, even without increased spending, the fiscal deficit is likely to overshoot the target,” Charu Chanana, emerging Asia economist with Roubini Global Economics said.

Meanwhile, there are some other risks to inflation. Monsoons have been near-normal, but the uneven spread has led to almost one-third of districts seeing a 20%+ deficiency in rainfall, which could increase price pressures for the current fiscal year. Higher global food and fuel prices and improved aggregate demand are likely to push inflation up further. Although average fiscal-year 2018 inflation is still likely to stay below the RBI’s 4% medium-term target, the momentum of core inflation has been higher than expected.

Currency View

A weakening rupee may also add to import price pressures in the near term. “Therefore, we expect the Bank to remain cautious for now,” adds Chanana.

India’s cumulative fiscal deficit has reached INR 5.25tn as of August, or 96.1% of the fiscal deficit target of INR 5.47tn for FY2017-18. The little room left for the government to boost spending could see a breach of the target easily in the months ahead. In addition, the finance ministry said in a statement Tuesday that the basic excise duty on gasoline and diesel will be cut by INR 2 a liter with effect from Wednesday, which would lead to a revenue loss of about INR 130bn in the remaining part of the current fiscal year.

With the festival season approaching, commercial banks are likely to entice consumers with lower rates or minimum balance requirements, which should allow the RBI to avoid further easing to help consumption recover.

Investment demand, meanwhile, is suffering from low capacity utilization and weak credit supply in light of managing balance-sheet stress. We do not believe rate cuts would help with these issues, and therefore expect the central bank to keep policy unchanged in October, until the fiscal outlook is clearer. However, divergence in the monetary policy committee will likely continue.

Photo Credit: A Reserve Bank of India (RBI) logo is seen at the entrance gate of its headquarters in Mumbai, India June 7, 2017. REUTERS/Shailesh Andrade

Email this to someoneShare on LinkedInShare on FacebookTweet about this on Twitter