India’s rate cutting cycle has come to an end and policy rates are likely to be on hold throughout 2017 as inflation is expected to stay above the Reserve Bank’s target, says a Nomura report.
The minutes from the Reserve Bank’s February 8 policy meeting shows that focus has shifted to lowering inflation towards the medium term target of 4 per cent.
The Japanese brokerage firm said growth is expected to bounce back as the economy is remonetised and inflation, which is a key factor for RBI’s policy decision, is also expected to inch higher owing to firming up of rural wages.
“We believe India’s rate cutting cycle has come to an end because growth should gradually bounce back as the economy is remonetised…
“…We expect inflation to also inch higher towards 5.5-6.0 per cent in second half of 2017-18 (above the RBI’s projection of 4.5-5.0 per cent) owing to the firming up of rural wages, higher minimum support prices and a gradual narrowing of the output gap,” Nomura India Chief Economist Sonal Varma said in a note.
Nomura expects policy rates to stay on hold throughout 2017, the note added.
The Reserve Bank in its policy review meet on February 8 kept key interest rate unchanged at 6.25 per cent and said that it is awaiting more clarity on inflation trend and impact of demonetisation on growth.
The next meeting of the MPC is scheduled on April 5 and 6, 2017.