The Monetary Policy Committee (MPC), which will be meeting next week, is likely to keep repo rate unchanged at 6% on inflation concerns, says a study. The consumer price index based- inflation inched up to a seven-month high of 3.58% in October from 3.28% in September.
The central bank will announce the policy review on December 6 after two days of MPC meeting beginning December 5.
Rating agency Icra said although the CPI inflation for October is lower than the range of 4.2% to 4.6% for the second half of FY18 that the MPC had forecast in its previous review, and the recent revision in GST rates would ease price pressures, certain inflation risks persist.
“With the CPI inflation likely to track a rising trend over the second half and print at around 4.5% in March 2018, we expect an extended pause amid non-unanimous voting by the MPC in the December policy review,” Icra managing director and chief executive Naresh Takkar said.
The agency said based on the expected gradual rise in currency with the public and continued working capital-led uptick in credit off-take, liquidity situation is likely to be close to neutral by mid-December 2017, with sporadic deficits anticipated around the next advance tax payment dates.
The Reserve Bank is likely to reiterate its stance of bringing systemic liquidity closer to neutrality on December 6, and primarily use overnight and term repos under the LAF to manage liquidity in the near term, he said.
Additional open market operations also seem unlikely, given the cancellation of the OMO sale scheduled for November 23, he noted.
With GVA growth estimated by the Central Statistics Office at 5.8% in the first half of FY18, a downward bias is likely to be placed on the MPC’s baseline forecast for growth of gross value added at basic prices of 6.7% for FY18.
The pace of economic expansion would have to improve sharply to 7.6% in the second half of FY 2018 to be in line with the MPC’s baseline growth forecast of 6.7% for the current fiscal, which seems unlikely despite a favourable base effect, it said.
The agency said a broad-based investment recovery is yet to set in, given the challenges faced by the corporate sector, and fiscal concerns at the central and state government level.
Moderate capacity utilisation, high leverage levels, and availability of brownfield distressed assets in some sectors, are likely to constrain fresh corporate investment for a few quarters, the report said.
Uncertainty regarding the buoyancy of indirect tax collections post-GST, and the continued fiscal consolidation forecast by the rolling targets, may limit the fiscal space available with the government to augment infrastructure investment in the near term, it added.
