Will the Reserve Bank of India hold the policy rate or cut it on Wednesday? While there is a section of experts who think the central bank will have to cut the rate to spur growth most of the polls of the economists have found it unlikely.
The Reserve Bank of India will hold policy steady on Wednesday, and well past next year, amid weak economic growth and signs inflation may soon overshoot its target, a Reuters poll found.
Indian economy started losing momentum after the government's shock demonetisation of the 86 percent of currency in circulation late last year. The move has hurt demand and the slowdown was compounded by the implementation of goods and services tax.
In August, despite a neutral policy bias, the RBI cut the key policy rate after lowering its economic growth forecast in June to 7.3 percent from 7.4 percent for the current fiscal year.
The latest poll of 60 economists by Reuters showed although the RBI will hold its key repo rate at a seven-year low of 6 percent on Wednesday, it will downgrade its growth forecast again following disruptions caused by the new tax.
Introduced on 1 July, the GST caused confusion over product pricing and pushed private sector activity into contraction.
Economic growth slowed to a three-year low last quarter, prompting some economists to lower their outlook.
“RBI has already been highlighting downside risks to growth, and that bias should now crystallize in the updated forecasts,” said Abhishek Upadhyay, economist at ICICI Securities PD.
However, lacklustre growth and inflation hovering below the RBI’s 4 percent medium-term target - annual retail inflation was 3.36 percent in August - would not be enough to drive the RBI into action, economists said.
Nearly two-thirds of forecasters who answered an extra question said there was a chance consumer inflation would overshoot the RBI’s medium-term target this fiscal year and medians suggest the Bank would hold policy until at least April 2019, the end of the forecast horizon.
The reverse repo rate is expected to be left at 5.75 percent across the same period.
However, not all economists are convinced the RBI will keep policy rates unchanged.
Credit Agricole CIB, Geojit Financial Services and Trust Capital predict a 25 basis point trim in the repo rate next week. Over a quarter of economists polled expect a cut by year-end.
“Growth is below the central bank’s expectations and they will react to that by their easing policy stance as strong annual growth is not achievable after what happened in the first quarter of this fiscal year,” said Darius Kowalczyk, senior economist at Credit Agricole CIB.
“So in order to stimulate aggregate demand, they will lower nominal rates and the time to do this is running out as inflation is rebounding.”
(With inputs from Reuters)