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RBI likely to maintain status quo on rates for entire 2018, say experts

As such, even as the market is not expecting a rate hike immediately

Anup Roy  |  Mumbai 

RBI likely to maintain status quo on rates for entire 2018, say experts

The (RBI) is likely to keep the key unchanged in 2018, despite bond yields rising sharply in the past three months. A rate hike might not come in the entire calendar year, economists and bond dealers said, adding a rate cut was not a possibility either.

The sharp upward movement in yields started in October last year, when the 10-year bond yields stood at around 6.65 per cent. The yields are now at 7.33 per cent. In the same period, the one-year overnight index swap (OIS), an instrument used to hedge rates, rose from 6.09 per cent to 6.46 per cent. In a theoretical sense, a rise in the rate might indicate rate hikes, but this time the movement was directly influenced by the rise in yields.

“It is very difficult for the to remain undisturbed when the yields are rising so much. Base case suggests there would be no hike in 2018. The rise in (bond) yields is more about supply and the possibility that the February budget, being an election budget, would be expansionary in nature,” said Ananth Narayan, a senior bond market expert.

RBI likely to maintain status quo on rates for entire 2018, say experts

While the introduction of a new 10-year benchmark paper has also pushed up yields, Narayan said some of the yield movement cannot be justified without a rate hike expectation.

As such, even as the market is not expecting a rate hike immediately. “The chances of a rate hike for almost all of 2018 are relatively low. Growth impulses, while improving, remain fragile, and a rate hike will be disruptive to interest costs. Even prospects of a change to a tightening stance remain limited, since markets are already sensitised to the chances of a rate hike,” said Saugata Bhattacharya, chief economist,

The minutes of the last monetary policy meeting showed that except Ravindra Dholakia, an external member, the other five members of the monetary policy committee voted for the status quo on

“At the next policy meeting (on 7 February), we expect the same five MPC members to vote to retain the status quo again. But we see a risk that Ravindra Dholakia flips his vote to maintaining the status quo as well because of higher inflation (in November and December),” wrote Nomura in a report dated December 20. “We expect to remain unchanged in 2018, despite higher inflation, recovering growth and elevated oil prices, mainly due to an ample real rate cushion.”

First Published: Fri, January 05 2018. 02:10 IST
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