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Why RBI may not cut key policy rates in 2018 despite dip in inflation

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

Press Trust of India  |  Mumbai 

RBI, Reserve Bank of India
Reserve Bank of India (RBI) head office in Mumbai | Photo: Reuters

Despite a dip in retail inflation in February, the 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 fiscal year. However, economists at the country's largest lender (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 apex bank would turn more hawkish. "We expect rates to remain on hold throughout 2018 mainly because banking sector risks are still a downside risk to sustainable growth," it said. Leading domestic credit ratings agency Crisil said while there is an improvement in the growth-inflation mix in numbers released yesterday, 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 ahigh 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 yesterday. Economists at Singaporean bank DBS also said they continue to expect the to stay put with a pause in 2018. The Rs 130 billion 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 highlighted the risks of inflation targeting framework in its note, saying the mark-to-market losses incurred by due to tightening of rates on policy expectations have exposed it to risks on the financial stability front. On the factory output growth, said it may touch a double-digit growth for the first time in February.

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First Published: Tue, March 13 2018. 16:25 IST