Has interest rates bottomed out?
Kolkata: The Reserve Bank of India has warned against possible spikes in prices and predicted Consumer Price Index to be in the range
4.3-4.7% in Q3 and Q4, more than the 4% inflation target, possibly signalling little elbow room for the central bank to ease policy rates further this financial year.
The cautious tone of the central bank on price level and fiscal slippages is possibly an indication that interest rate cycle is bottoming out.
"The real problem at this point is that nobody has any clue about how tax revenue flow going to be this fiscal. The government may not have any real take until February next year. So, RBI will have limited elbow room," Pronab Sen, former chief statistician told ET Now.
The tone of the policy document mildly cooled the 10 year G-sec yield while led a 0.63% fall in BSE Sensex to 32,597.18. "The expected uptick in CPI inflation spells a low likelihood of rate cuts in the immediate term. We expect an extended pause for the policy rate as a baseline scenario going into 2018," ICRA Group Managing Director Naresh Takkar said.
RBI observed the implementation of farm loan waivers by some states, along with partial roll back of excise duty and VAT in the case of petroleum products, and a fall in revenue on account of lowering GST rates for several goods and services may result in fiscal slippage with attendant implications for inflation.
The impact of HRA by the central government is expected to peak in December, RBI said. "The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects," it said warning against sustainable rise in international crude oil prices.
"Neutral stance means all possibilities are on table," Governor Urjit Patel said.
The recent increase in oil prices may also have a negative impact on margins of firms and Gross Value Added (GVA) growth. While shortfalls in kharif production and rabi sowing pose downside risks to the outlook for agriculture, there has been some pick up in credit growth and recapitalisation of public sector banks is expected to improve credit flows further. Keeping these in mind, the central bank kept GVA projection at 6.7%–unchanged from the October policy announcement.
RBI however expects GVA growth to be in the range of 7-7.8% in Q3 and Q4.
"This is really optimistic given the risk of fiscal slippages," said HDFC Bank chief economist Abheek Barua.