Analysts at NAB note that the RBI held the benchmark Repo rate at 6% at its February meeting, in line with expectations and also raised their inflation outlook, and highlighted upside risks to the forecasts.
- The RBI lifted its inflation forecasts. For the April-September 2018 period it projected inflation to be around 5.1-5.6%; in the October 2018-March 2019 period inflation is forecast to have around 4.5-4.6%.
- However, they highlighted upside risks to the forecasts. Some of the factors which could cause upside risks include: fiscal slippage – including by State Governments; possible elevation in crude oil prices; higher Minimum support prices for agricultural produce; and finally, rising inflationary pressures from a weaker currency due to higher interest rates in developed economies such as the United States. The RBI did also mention possible mitigants such as subdued rural wage growth and modest level of capacity utilisation.
- In light of the recent higher inflation outcomes and forecasts, coupled with the RBI’s commitment to ensure that the inflation rate remains around 4% on a sustainable basis, we have decided to alter our interest rate outlook.
- NAB Economics is forecasting the RBI to raise the benchmark Repo rate by 25bp to 6.25% (previously on hold) in the December quarter, 2018.
- Risks to our forecasts are evenly balanced. Higher than expected inflation outcomes could prompt the RBI to act faster and more aggressively with regard to raising rates. Conversely, if inflation turns out lower than forecast, the RBI might not lift rates, and even consider a cut.”
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