The Reserve Bank of India (RBI) holds fire as expected, leaves key rates unchanged. Governor Urjit Patel hints that "neutral" stance may continue for at least 6 months and announces faster recapitalization of PSU banks.
Sonal Varma, MD & Chief India Economist, Nomura Financial Advisory & Securities (India) said the policy was as expected hawkish and the statements tell us that they are comfortable to be on hold right now. So, definitely they don’t seem to be in a rush to hike rates and neither are they signaling that easing is round the corner.
With regards to inflation, she said there are two main upside drivers for inflation, one is oil and second is vegetable price increases in November and have continued in December, which clearly suggest that the inflation reading for both the months will be on the higher side.
However, there is a possibility that vegetable prices may drop in the winter months, maybe it’s pushed to the Jan-March quarter. So although inflation readings in next two readings, they could moderate in the 2-3 readings after December.
In light of the above, the house pins March inflation around 4.5 percent although for the quarter on an average the number could be 4.7-4.8 percent, said Varma.
The RBI yesterday retained its annual growth forecast of 6.7 percent GDP but said the risks are evenly balanced.
Relating to the RBI’s growth projections, the risks are clearly to the downside, said Varma.
October was a weak month but November will be a strong month but on an average October-December quarter there will be an acceleration. However, an acceleration to 7 percent does not seem likely. Nomura has a forecast of 6.4 percent, so directionally the growth cycle may pick up but the extent is lower than what RBI is predicting.
Projecting the trend for bond yields, she said at current levels lot of the bad news is baked into the price and they could be around 6.75-6.8 percent by January, 2018.