Macro Economy

Inflation to stay above RBI’s comfort zone: Barclays

K. R. Srivats New Delhi | Updated on January 27, 2014 Published on January 26, 2014

Prospects of growth recovery remain fragile

Barclays’ sees the Reserve Bank of India (RBI) maintaining status quo on policy rates on January 28 and during the early part of 2014.

Despite softening in the recent weeks, inflation remains high and the central bank faces a difficult choice as the basket of macro parameters remain challenging, said Siddhartha Sanyal, Chief India Economist, Barclays.

The prospects of growth recovery remained fragile. The elevated-for-longer interest rate trajectory and the constrained government spending turn out to be fresh headwinds, according to Sanyal.

“On balance, I feel the RBI would like to maintain a status quo on the key policy interest rates in its January policy”.

Sanyal said he expects inflation to enjoy a gradual softening bias in the coming months, but it will still likely stay above the RBI's comfort zone (5 per cent).

On the other hand, the persisting weakness in the economy remains another key challenge.

At the same time, one must recognise that the current repo rate of 7.75 percent is not low. “Overall, on balance, holding the policy rates steady would be the best policy for the moment”.

RBI Governor Raghuram Rajan had surprised markets on December 18 when he kept policy rates unchanged on the hope that food prices will cool on improved supplies. He had hiked policy rates in each of the earlier two successive monetary policy reviews.

URJIT PATEL COMMITTEE

The Urjit Patel committee report, which was submitted to RBI Governor last week, may not initially have a strong impact on the central bank's immediate decision making process.

But the report can be considered as an important “vision” document that provides a roadmap for the reform of monetary policy, one that can be pursued along with financial market and banking sector reforms, said Sanyal.

Sanyal said that recommendations of the Urjit Patel Committee, if implemented, would represent a significant departure from the traditional policymaking process in India.

However, in order to meet several preconditions of moving to inflation targeting, the RBI will need active cooperation from the Finance Ministry.

This will be crucial in removing administered prices and adhering to FRBM-defined fiscal deficit targets.

Given that India is only months away from the parliament elections, such long term co-ordination plans might have to wait for till the elections, Sanyal said.

FOREIGN INFLOWS, GDP EXPECTATIONS

Barclays expects the Indian economy to grow 4.7 percent in the current fiscal and 5.6 percent in 2014-15.

Sanyal said inflows from foreign investors would remain under the influence of election expectations.

As long as the expectations of a reasonably stable government remains strong, foreign flows would likely remain meaningful, he added.

>Srivats.kr@thehindu.co.in

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Published on January 26, 2014
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