International banking major HSBC expects Reserve Bank of India (RBI) to leave policy rates unchanged for the second time in a row on January 28, although it is admittedly yet another close call.
Taking a cue from the notable slowdown in headline inflation, the RBI will remain on hold again, HSBC’s Chief Economist for India and ASEAN Leif Eskesen, said in a note to its clients.
The weak growth backdrop, including the expected fiscal tightening in the coming months, may again serve as arguments for a pause, the note added.
RBI Governor Raghuram Rajan had last month surprised markets and economists by holding the benchmark repurchase rate at 7.75 per cent. The central bank was more cautious about growth and hopeful that inflation would ease on improved food supplies.
Beyond the upcoming monetary policy meeting, HSBC has pencilled in a 50-basis-point policy rate increase between now and summer.
There is a need for further rate hikes this year and a bold new monetary policy framework may help pave the way, HSBC has said.
Inflation threat highInflation expectations remain elevated and there are no structural reforms, prompting HSBC to believe the RBI will likely have to tighten monetary policy further. “Core inflation is far too high and a decline in the near term is not on the cards”. If the recently proposed change to the monetary policy is introduced, that could also help pave the way for further rate hikes, HSBC note said.
The RBI-appointed Urjit Patel Committee, which was tasked to review the existing monetary policy framework, has recommended a switch to a rule-based monetary policy framework from a discretionary approach. The committee has recommended using heading consumer price index (2010 base) as the nominal anchor, replacing the multiple indicator approach.
It also suggested making inflation the “predominant objective” of monetary policy. The panel also proposed adopting a 4 per cent target for CPI with a band of plus or minus two percentage points by 2016. Consumer prices rose 9.87 per cent on an annual basis in December last year, prompting some policymakers to describe proposed the CPI target of 4 per cent as an “ambitious” one.