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India central bank expected to keep benchmark rate at 7-year low

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A survey of economists conducted by Bloomberg News showed the RBI is expected to hold the repurchase rate at 6 per cent until end-2017.

[MUMBAI] India's central bank is expected to keep its benchmark rate at a seven-year low this week amid slowing growth in Asia's third-largest economy.

With inflation climbing fast towards the Reserve Bank of India's (RBI) medium-term target, the Federal Reserve starting to shrink its balance sheet and growing speculation the government may loosen purse strings to bolster the economy, the room for lowering rates in the coming months is narrowing.

Nevertheless, the RBI is expected to paint a subdued picture of the economy and could downgrade its forecasts for gross value added - a key input of gross domestic product that strips out taxes and subsidies - for the rest of the year.

That could prove to be bad news for India and might hurt inflows from foreign investors, who are already pulling out money from Indian assets. This has seen the rupee hit a six-month low last week.

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A survey of economists conducted by Bloomberg News showed the RBI is expected to hold the repurchase rate at 6 per cent until end-2017.

A separate survey forecast India's growth at 6.8 per cent in 2018, down from 7.3 per cent earlier.  For the third-quarter of 2017, India is expected to grow at 6.6 per cent, year on year, down from a previous forecast of 6.9 per cent, as it grapples with uncertainty caused by a newly introduced goods and services tax, a banking system tackling bad loan problems and companies refusing to invest more as they try to lower debt taken during the boom years.

"We are in agreement with financial market and analyst expectations of a rate hold," said Shilan Shah, India economist at Capital Economics, Singapore.

"Further ahead, some are still expecting further, albeit modest, policy loosening. However, with core price pressures building, we expect rates to stay on prolonged hold."

The RBI faces a juggling act over whether to bolster growth or retain its prime target of keeping inflation checked at 4 per cent in the medium term. At the last meeting in August, it opted to cut interest rates to give an "urgent" boost to flagging investments.

At the same time, Governor Urjit Patel and his deputy Viral Acharya stressed the need for better monetary policy transmission, highlighting what many economists see as signals that the RBI was probably reaching the end of its rate-easing cycle.

"We will watch out for the evolution of domestic growth-inflation dynamics," said Madhavi Arora, an economist at Kotak Mahindra Bank Ltd.

"If growth and inflation continue to surprise on the downside, RBI could cut an additional 25-50 basis points in the next six months. Our base case currently is for status quo for rest of FY2018."

BLOOMBERG