The Reserve Bank is likely to keep key policy rates “unaltered” in the near term as prices of goods and services are expected to be volatile post GST and favourable inflation base effect wanes out, says a report.
While there are increased expectations for a policy rate cut due to moderation in the both WPI and CPI inflation along with weak industrial production and GVA growth rate, future policy stance will be contingent on a number of factors, Dun & Bradstreet India Lead Economist Arun Singh said.
According to D&B Economy Observer Index, the top factors to impact RBI’s policy stance are pace of increase in demand in the economy, impact of geo-political events, impact of increase in recent MSP in pulses, oil seeds and cotton, announcement of farm loan waivers, implementations of 7th Pay Commission awards and any policy announcement by US Fed.
“Since price of goods and services are likely to be volatile as GST sets in and the base effect of the headline inflation numbers wanes out post July 2017, we expect policy rates to remain unaltered in the near term,” Singh said.
Base effect along with deflation in some of the primary articles and appreciation in rupee would keep the inflation rate lower in the near term.
On the other hand, factors like remonetisation driven demand conditions, 7th Pay Commission award, increase in MSP in pulses, oil seeds and cotton, normal monsoon and implementation of GST are expected to give upward pressure to prices.
D&B expects the CPI inflation to be in the range of 1.3-1.5 per cent and WPI inflation to be in the range of 1.3-1.5 per cent during June 2017, respectively.
In the monetary policy review on June 7, RBI left key rates unchanged with Governor Urjit Patel noting that the central bank wanted to be more sure that inflation will stay subdued.
Despite inflation moderating sharply in April, the Monetary Policy Committee (MPC) decided to leave policy rate unchanged as a “premature action at this stage risks disruptive policy reversals later and the loss of credibility”.