DBS says that the decision to hold the rates would be mainly influenced by the movement in oil prices and the currency, which its economists term as “wildcards”.
Singaporean lender DBS sees the Reserve Bank holding the rates for the remaining part of the fiscal year ending March 2019, according to a report the Financial Express. DBS also predicts that the apex bank would opt for “measured hikes” in FY20 with inflation rising.
DBS economists predict that the decision to hold the rates would be mainly influenced by the movement in oil prices and the currency, which they term as “wildcards”.
The report released just a few days after headline inflation print eased to an unexpected 3.31 per cent for October, had the DBS lowering its consumer price inflation (CPI) expectations for FY19 to 4 per cent from 4.4 per cent earlier.
However, the price rise will go up to 4.2 per cent for FY20, which may prompt the RBI to go in for a hike. “The RBI is likely to get the leeway to hold the rates unchanged this year owing to the below target inflation. We pencil in measured hikes in FY20 to contain core pressures, with oil and currency direction seen as wildcards,” media reports quoted a DBS note.
According to DBS, inflation is averaging at 4.2 per cent for the first seven months of the fiscal year. It points out to lower procurement of food crops by the government through the minimum support price (MSP) mechanism to buttress its point. The lender emphasized that the increase in inflation expectations next fiscal will be largely driven by food.
However, DBS warned that though slower procurement is positive for inflation, a prolonged phase of weak food/farm prices can trigger negative repercussions for agricultural incomes and rural demand.
Notably, the RBI is committed to anchor the price rise at 4 per cent with a leeway on either side under its medium term inflation targeting framework.
The central bank has so far hiked rates twice by a cumulative 0.50 per cent this fiscal, in response to inflationary concerns from factors like rupee depreciation which lost over 13 per cent year to date and higher oil prices which rose to USD 86 a barrel earlier this month but is considerably down now.
Notably, In the past month, the movements in both the crude prices and the rupee have been positive for the domestic economy.
The RBI’s inflation modelling drew flak recently following the release of data for October, which showed the headline number declining to a surprising low.
DBS has cautioned India to be vigilant of hardening of rates in the US even though rupee has been strengthening, as it may lead to capital outflows.