RBI expected to maintain status quo: DBS

Says RBI's inflation target of 6 per cent for January 2016 is unlikely to be breached

The Reserve Bank of India (RBI) is expected to keep the interest rate unchanged in its sixth bi-monthly policy review meet tomorrow, Singapore's leading bank DBS said today.

"As markets stabilise, we expect the Reserve Bank to keep the rates on hold on February 2. After a total of 125 bps rate cuts in 2015, the benchmark Repo rate is likely to be held at 6.75 per cent and reverse repo rate at 5.75 per cent," it said in a report on the Indian economy.

"Reserve ratios will be left unchanged, we reckon. We see room for a 25 bps cut in March or April if the 2016-17 Budget satisfies the central bank on the government's fiscal consolidation efforts. (A March cut would be an inter-meeting decision)," it said.

Inflation is still within January 2016 targets, but faces upward risks as CPI inflation has been inching up since the third quarter of 2015. From a low of 3.9 per cent year-on-year in the September quarter, inflation rose to more than a year's high at 5.6 per cent by December, noted the bank.

Core inflation, while still benign, has also tracked the uptrend, it added.

Other price indicators, for instance WPI inflation and PMI sub-indices are also off recent lows, said the bank.

"The disinflationary impact of low crude prices was more than offset by a sharp jump in food price pressures and were not helped by adverse base effects," it pointed out.

Service sector inflation remains sticky and indeed rose to 4 per cent year-on-year from 3.1 per cent in the September quarter.

Despite the recent increase, the inflation outlook appears manageable, said the bank with a growing presence in the Indian market.

The RBI's inflation target of 6 per cent for January 2016 is unlikely to be breached, it said.