RBI is likely to keep key policy rates unchanged until the budget on February 29 and go for a 25 bps easing in March/April this year, says a Citigroup report.
According to the global financial services major, the Reserve Bank of India is expected to maintain an accommodative stance.
“Considering the near-term risks on CPI inflation and the uncertainties around FY17 budget, we expect the RBI to leave rates unchanged until the budget on February 29th,” Citigroup said in a research note today.
Citigroup believes a 25 bps easing is likely in March/ April this year.
“As regards timing, we think RBI could ease right after the budget, potentially in March itself. We also note that the banking system will move to a new marginal cost-based lending rate regime from April 1st (for better transmission) which could influence timing as well,” the report noted.
The near term risks to Consumer Price Index (CPI) include, sustained rise in food prices (pulses, edible oil, sugar), and also the torrential flooding in southern states in November-December.
Furthermore, the impending wage hikes from 7th pay commission could add around 50 bps to headline CPI-based inflation in early 2016-17, the global brokerage firm said.
According to Citigroup, CPI inflation could briefly exceed RBI’s target range in the near term. In addition, there are uncertainties around the fiscal deficit roadmap in the upcoming FY17 budget on account of 7th pay commission implementation, which would entail additional revenue expenditure of around 0.5 per cent of GDP.
The report noted three reasons for RBI’s accommodative stance — continued disinflationary pressures from the global economy, its March 2017 target of 5 per cent inflation could be achieved after the transitory impact from CPI wears off, and the recent slump in crude prices, if extended, could help government stay on targeted fiscal roadmap.
RBI’s next bi-monthly policy review is on February 2.
