The Reserve Bank of India (RBI) is likely to keep rates unchanged in the April policy review as the country's retail inflation rose above the Monetary Policy Committee's MPC target for the second month in a row.
India's retail inflation rose to near six-year high of 7.59 percent in January, up from 7.35 percent in the previous month, according to data released on February 12. The rise was led by 50.19 percent increase in vegetable prices and 16.71 percent in pulses. While core CPI rose to 4.21 percent, inflation excluding vegetable prices also remained high at 5 percent.
In its February policy review, the MPC maintained status quo as retail inflation breached the upper limit of inflation targeting framework for the the first time in December. However, the rate setting committee also continued to remain accommodative as it expects the inflation drivers to reverse going ahead.
RBI Governor Shaktikanta Das said that there was room for a rate cut but the timing was essential.
In a risky trade off between inflation and growth, the RBI steered around the rate action to ease liquidity for select sectors of housing, automobiles and MSMEs, in order to revive credit growth. it also announced liquidity injection of Rs 1 lakh crore via long term fixed rate repo auctions to support growth.
The RBI’s decision, however, hinged upon the inflation trajectory peaking out in coming months. It expects inflation to ease back into the comfort zone by third quarter of next financial year.
Aditi Nayar, principal economist at ICRA, expects RBI to extend the pause.
"The internals of the food inflation are worrying, given a broad-based uptick across categories that tend to be sticky, such as proteins, and a narrower-than-expected reduction in the inflation for vegetables. Moreover, the fairly broad-based rise in the core inflation to 4.1 percent in January 2020, driven by various services, is a cause for concern," she said.
Nayar added that the timing and magnitude of the next rate cut will depend on how quickly inflation appears to be reverting back towards 4 percent.
In the February policy review, the RBI revised its inflation estimates to 6.5 percent for January-March quarter, 5.4-5.0 percent for first half and 3.2 percent for third quarter of next financial year. It expects GDP growth at 6 percent for 2020-21.
"Rate cuts are things of the past and 3QFY20 GDP growth will be definitely lower than in 2QFY20," said Nikhil Gupta, Chief Economist at Motilal Oswal Financial Services.
As per the RBI Act, MPC’s inflation target is set every five years. The current range of 2-6 percent will be up for review in March 2021. Also, the MPC will witness some changes in August 2020, as its external members appointed by the government complete their tenure.
If the inflation breaches the tolerance levels for any three consecutive quarters, the RBI will have to report to the government explaining the reasons for failing to achieve the set target with remedial measures and the timeframe during which it plans to implement them.
The MPC will also closely watch the next set of inflation data due for release on March 12, before it meets to review rates on April 3.