RBI rate cut in FY19 unlikely
Brokerages expect the central bank to stay put with a pause in 2018 despite dip in inflation

Despite a dip in retail inflation in February, the Reserve Bank of India (RBI) is unlikely to reduce key policy rates in 2018, analysts at brokerages said on Tuesday. Risks like the higher minimum support prices (MSPs) for food grains promised in the budget, according to th­em, can push up the inflati­on in the next financial year.

However, economists at the country’s largest lender State Bank of India (SBI) said that the “best is yet to come” and the RBI’s inflation targets will be undershot by up to 0.50 percentage points.

Terming it as a “challenging period” for the central rate setting panel, Japanese brokerage Nomura said the rising MSPs are a risk and once inflation starts rising from the second quarter, the central bank would turn more hawkish.

“We expect rates to remain on hold throughout 2018 mainly because the banking sector risks are still a downside risk to sustainable growth,” it said.

The central bank’s next monetary policy review is scheduled for April 5. It had kept the policy rate unchanged in its February meeting on fears of inflation.

Leading domestic credit ratings agency Crisil said while there is an improvement in the growth-inflation mix in numbers released on Monday, it is unlikely to result in any rate cut by the central bank in the next six months. It estimates the headline inflation for financial year 2018-19 at a high 4.6 per cent on rising consumption demand, house rent allowance revisions and elevated crude prices.

Retail inflation eased for the second straight month in February to 4.4 per cent, while the factory output growth for January was at a two-month high of 7.5 per cent, according to a data released by the Central Statistics Office (CSO) on Monday. Retail inflation was 5.07 per cent in January. In February 2017, however, it was 3.65 per cent.

Economists at Singaporean bank DBS also said that they continue to expect the central bank to stay put with a pause in 2018.

The Rs 13,000 crore scam at the Punjab National Bank (PNB) featured prominently in many commentaries, with the analysts saying that it may hurt the recovery efforts underway in the economy.

Nomura said the PNB fraud and the resultant provisioning and the treasury losses are a “downside risk” to growth, while according to DBS, it is a “cog in the wheel of a swift recovery”.

State-run SBI highlighted the risks of inflation targeting framework in its note, saying the mark-to-market losses incurred by banks due to tightening of rates on policy expectations have exposed it to risks on the financial stability front.

On the factory output growth, SBI said it may touch a double-digit growth for the first time in February.

Meanwhile, Swiss brokerage firm UBS said in a report that CPI inflation is expected to rise over the next few months and average close to 4.7 per cent in 2018-19, driving RBI to keep key policy rates on hold in the coming financial year. The headline CPI inflation may average close to 4.7 per cent in 2018-19 (as against 3.6 per cent estimated in 2017-18), it said.

“In our base case, we still expect the monetary policy committee (MPC) to keep rates on hold in 2018-19,” the report authored by Tanvee Gupta Jain, economist at UBS Securities India, said.

Jain, however, noted that there might be a pre-emptive 50 bps hike over the next 12 months to ensure macro stability.

As per the report, the key risks to the base case CPI inflation forecast include higher MSPs, global crude oil prices strengthening further and populist spending in the run-up to 2019 general election. If these risks materialise, “we do not rule out a pre-emptive 50 bps hike over the next 12 months to ensure macro stability risks are contained,” Jain added.

Following the easing of retail inflation in February, there is industry clamour for a rate cut by RBI next month to maintain growth momentum.