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RBI likely to leave rates unchanged in October policy review: Icra

LiveMint logoLiveMint 28-09-2017 PTI

Mumbai: Despite rising shrill calls for a fiscal and monetary boost after Q1 GDP (gross domestic product) slipped to a three-year low, the Reserve Bank of India (RBI) is likely to leave policy rates unchanged in the forthcoming policy review next month as it expects a spike in retail inflation going ahead, says a report.

Retail inflation rose to a five-month high of 3.36% in August from 2.36% in July. August inflation number was the highest since March 2017, when it was recorded at 3.89%.

“Retail inflation is expected to average 3.7% in FY18, lower than the medium-term target of 4%. With the repo rate at present at 6%, there maybe room for further monetary easing. However, we do not expect a rate cut in the upcoming policy review, as CPI (consumer price index) inflation is expected to chart an upward trajectory over the coming months, and print between 4.5 and 5% in March 2018,” Icra managing director Naresh Takkar said in a report on Thursday.

The MPC (monetary policy committee) meeting is scheduled for 3 and 4 October. While an interest rate cut would be welcomed by corporates, it’s unlikely to be sufficient to meaningfully rekindle investment activity, he said.

Extra budgetary resources raised through tax-free bonds by central PSUs (public sector units), could boost investment in high-multiplier sectors such as roads, railways, metro networks and affordable housing, without affecting the fiscal deficit.

“Moreover, targeted policy intervention to address procedural concerns like those being highlighted by exporters, may be more effective than a 25 bps rate cut,” he said. The rating agency expects the MPC to revise its baseline forecast for GVA (gross value added) growth for FY18 to under 7.3% estimated in the June and August policies.

The recent data on economic activity has been subdued and the transitional challenges posed by the GST (goods and services tax) have persisted for longer than what was initially anticipated, dampening business sentiment, Takkar said.

The report, however, said the recent slowdown in growth is likely to prove transitory in nature. A favourable base effect is likely to contribute to higher GVA growth in the remaining quarters of FY18, relative to the subdued 5.6% in the June quarter, he said.

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