The Budget is positive for the medium-term inflation outlook which may lead to a 25 bps rate cut at the monetary policy meet next week, but RBI is expected to keep it on hold for the whole of 2017, says a report. According to Japanese financial services major Nomura, though the Reserve Bank might go for a policy easing on February 8, it would be a “close call” considering some global factors like higher oil prices and narrowing interest rate differentials.
“On the monetary policy front, with the government sticking to fiscal consolidation and headline CPI likely to undershoot the RBI’s March 2017 target of 5 per cent, we are pencilling in a final 25 bps repo rate cut to 6 per cent on February 8,” Nomura said in a research note adding with global factors turning negative (higher oil prices, narrowing interest rate differentials), “this is a close call”.
Thereafter, Nomura expects both growth and inflation to accelerate, keeping the RBI on hold throughout 2017. On December 7, the central bank kept interest rate unchanged despite calls for lowering it. It also lowered the economic growth projection by half a percentage point to 7.1 per cent in the first policy review post demonetisation. The central bank will hold its next monetary policy meet on February 8. The report further noted that the Budget is positive for the medium-term inflation outlook but the pending increase in housing allowances, likely to be implemented from April 2017, is a near-term upside risk to inflation.
“This is a statistical impact, but higher house rent allowances can add 100-150 bps to headline CPI inflation,” it said.