India’s Policy Interest Rate Kept at 6.0%
December 6, 2017
Although the decision not to change India’s monetary policy settings had been expected, the released statement embodies some mixed signals. There was a single dissenting vote to cut the main policy rate by 25 basis points to 5.75%. A previous such cut this year occurred in early August. On the other hand, note was made that inflation had risen further in October and, more importantly, that expected inflation has crept higher. “The Reserve Bank’s survey of households showed inflation expectations firming up in the latest round for both three months ahead and one year ahead horizons.” While price risks are deemed symmetrical, numerous upside risks are cited:
Moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed. There is a risk that this upward trajectory may continue in the near-term. Second, the impact of HRA by the Central Government is expected to peak in December. The staggered impact of HRA increases by various state governments may push up housing inflation further in 2018, with attendant second order effects. Third, the recent rise in international crude oil prices may sustain, especially on account of the OPEC’s decision to maintain production cuts through next year. In such a scenario, any adverse supply shock due to geo-political developments could push up prices even further. On the whole, inflation is estimated in the range 4.3-4.7 per cent in Q3 and Q4 of this year, including the HRA effect of up to
35 basis points.
From January 2015 to August 2017, a cummulative 2 percentage point reduction of the central bank interest rate was implemented. Despite the dissenting vote in the last meeting of 2017, it seems more likely that the next rate change will be upward.
Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Reserve Bank of India
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