Status quo on rate good, inflation risks weigh on upside: Ind-Ra

Sunil Kumar Sinha, Principal Economist, India Ratings & Research“As expected RBI kept the policy rates unchanged in the third bi-monthly policy review of 2016-17. On the positive side RBI noted that (i) Kharif sowing has gathered pace, after a lacklustre start particularly with respect to pulses, (ii) some signs of improvement in business confidence and (iii) liquidity conditions have eased and yields on government bond have dropped.However, on the negative side RBI noted that (i) retail inflation in the month of June was at a 22nd month high, mainly driven by food items, (ii) Brexit -  has increased the volatility in global financial markets worldwide, resulting in investors looking for safe havens.Overall RBI’s assessment is guided by the trajectory inflation may take in the near term, given the stickiness in the food and services inflation. The implementation of the 7th central pay commission (CPC) award is expected to have a direct impact on the house rent component of CPI.Thus Ind-Ra believes, risks to the inflation outlook seem to be tilted to the upside and a status quo on policy rates has been the correct stance.”