MumbaiThe Reserve Bank of India (RBI) is expected its policy rate unchanged at a policy meeting this week despite a sharp slowdown in economic growth, after inflation surged to a five-month high, threatening the central bank’s target.
The RBI has made a priority of maintaining consumer inflation at around 4 percent – the midpoint of its mandated target of 2 to 6 percent — having switched to a “neutral” policy stance from “accommodative” earlier this year.
It is thus expected to react with concern after a surge in food prices boosted retail prices up 3.36 percent in August from a year earlier.
Analysts expect inflation could continue to quicken, given food prices tend to rise during the winter.
Worryingly, core inflation – which excludes energy and food – has remained even higher, reaching 4.6 percent in August amid stubbornly high prices in key areas such as health and education.
The inflationary trend could rule out any chance that the RBI will cut the repo again, after lowering it by 25 basis points to a seven-year low of 6 percent at its last meeting in August, even as economic growth unexpectedly slowed to a three-year low of 5.7 percent.
The RBI also will likely be concerned by growing expectations that the government will ramp up spending to boost growth, potentially leading to a loosening of its current fiscal deficit of 3.2 percent of gross domestic product for the year ending in March.
All but 3 of 60 analysts surveyed by Reuters expected the RBI’s monetary policy committee (MPC) to keep the repo rate unchanged, and a majority of analysts forecast no changes until at least early 2019.
“We expect the MPC to keep rates on hold and retain the neutral (policy) stance,” said A. Prasanna, an economist for ICICI Securities Primary Dealership in Mumbai.
The MPC will announce its decision at 2:30 pm India time (0900 GMT) on Wednesday.
Price Pressures
Other signs point to potentially higher inflation, just as the RBI had projected in August, when the MPC said it expected consumer prices to advance 3.5 to 4.5 percent in October-March.
Crude prices have rallied, sending Brent crude to its highest in more than two years, a worry given India imports most of its energy needs.
The RBI will also be deterred from easing given lingering uncertainty as the U.S. Federal Reserve gears up to start unwinding some of its massive monetary stimulus later this year and continues to gradually raise U.S. interest rates.
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