Policy rate unlikely to be cut as retail inflation shows upwards trajectory, says ICRA

Expectation of a further rise in retail inflation may preclude the Reserve Bank of India from cutting the policy repo rate in the upcoming monetary policy review, according to ICRA.

The credit rating agency is anticipating the Monetary Policy Committee (MPC) to leave the repo rate unchanged at 6 per cent in a split decision in the fourth bi-monthly monetary policy statement, which is scheduled to be released on October 4 .

However, it sees the baseline forecast for gross value added (GVA) growth for FY18 to be revised lower from the 7.3 per cent estimated in the policies of June 2017 and August 2017.

Naresh Takkar, Managing Director and Group CEO, ICRA, said: “The CPI (consumer price index) inflation is expected to average 3.7 per cent in FY18, lower than the medium-term target of 4 per cent.

“With the repo rate at present at 6 per cent, there may be room for further monetary easing. However, we do not expect a rate-cut in the upcoming policy review, as the CPI inflation is expected to chart an upward trajectory over the coming months, and print between 4.5 and 5 per cent in March 2018.”

While an interest rate cut would be welcomed by corporates, it is unlikely to be sufficient to meaningfully rekindle investment activity, he added.

The agency’s chief said that extra-budgetary resources raised through tax-free bonds by central public sector undertakings could boost investment in high-multiplier sectors such as roads, railways, metro rail and affordable housing, without affecting the government’s fiscal deficit.

Moreover, targeted policy intervention to address procedural concerns such as those being highlighted by exporters, may be more effective than a 25-basis-point rate-cut.

The year-on-year (y-o-y) CPI inflation has recorded a rapid and broad-based rise to 3.4 per cent in August 2017 from 1.5 per cent in June 2017.

“With an uneven spread and modest deficit in monsoon rainfall, the First Advance Estimate of crop production has estimated a y-o-y drop in output of several major kharif crops, except sugarcane, a key risk for food inflation, going forward.

“Higher prices of petrol and diesel and some lagged revision in final prices on account of the pass-through of the Goods and Services Tax (GST), pose additional inflationary risks,” ICRA said in a statement.

Moreover, the revision in house rent allowance (HRA) of Central government employees would have a staggered impact on the housing index of the CPI, which is likely to push up housing inflation over the coming year.

Based on these factors, ICRA expects the CPI inflation to harden further to 4.5-5 per cent by March 2018, reducing the likelihood of monetary easing in the upcoming policy review.

The agency cautioned that if the lack of clarity on revenue buoyancy for the Central and State governments after the transition to GST persists over the next few months, it may affect the Budget planning process for FY19.

COMMENT NOW