Economists expect status quo in RBI policy on Jan 28

A lower vegetable price has helped the December Wholesale price index (WPI) inflation number to come to 6.16%, a sharp drop from 7.5% in the previous month. Economists drew comfort from these numbers despite the uptick in core inflation to 2.75% from 2.63%.  Most of them predict that the Reserve Bank of India will not raise the repo rate at its next monetary policy review on January 28.

Rating agency Crisil’s economists said, “With the noise in inflation data (created by high and volatile prices of vegetables) likely to abate further, we do not expect the Reserve Bank of India to raise the repo rate in its monetary policy review scheduled on January 28. Core inflation measured by non-food manufacturing inflation rose marginally to 2.8% in December and remains close to the RBI’s threshold of 3%. Future course of monetary policy actions would depend on the magnitude of pick-up in core inflation and recommendations of the expert committee set up to revise and strengthen the monetary policy framework set up by the RBI.”

Indranil Pan, Chief Economist, Kotak Mahindra Bank said, “The RBI will be in no position to ease its monetary policy stance, despite the relatively larger-than-expected drops in the Headline numbers. On a more generalised basis, the core prints do point to the fact that the demand side compressions have not yet been adequate. Based on this, the call for the monetary policy now becomes even closer as the core inflation on both the WPI and the CPI has now ticked higher. However, the RBI might still be seen favouring a pause on January 28 on the basis that past monetary policy action is taking a larger time to seep through the real sector of the economy and that the recent positive momentum on the currency might have a salutary benefit for the core in the next few months.”

While agreeing with the view that RBI will hold rates in the forthcoming review, Upasna Bhardwaj, Economist, ING Vysya Bank said in a note,” For most of last year, sharp weakness in Rupee has pushed up the cost of raw materials but lack of pricing power has led to limited pass through to customers. We believe that some pass through of earlier borne higher input costs would begin to reflect in the index going forward. We, thus, expect core WPI inflation to continue trending up towards 3.4% by Mar-14. Also, indexation of NREGA wages with CPI and high rural wages (Even though the pace has moderated) is likely to add to the downward rigidities to overall prices.  We, thus, expect price pressure to remain elevated in H1-2014 and hence cannot rule out another 25 bps of Repo rate hike in the months ahead.”

COMMENT NOW