RBI on hold for now, 50 bps rate hike likely in 2018

New Delhi: The Reserve Bank is expected to keep rates on hold this year as near-term inflation outlook is benign, but a cumulative 50 bps hike in 2018 is likely as growth accelerates, says a report.

According to Japanese financial services major Nomura, the RBI is looking through the current low inflation prints and may keep policy rates unchanged in 2017. However, as growth and inflation pick up, a move towards tightening the policy bias with a cumulative 50 bps repo rate hike in 2018, starting next April, is expected.

Retail inflation based on consumer price index (CPI) dropped to 2.99 per cent in April over last year, mainly due to lower cost of food items, including pulses and vegetables.

Wholesale inflation data this time were based on new series with revised base year of 2011-12 as against 2004-05.

The WPI based inflation, based on the new series, slipped to a four-month low of 3.85 per cent in April as both food articles and manufactured items eased. Though the near-term inflation outlook is very benign, Nomura expects headline CPI inflation to rise sharply to 5.5-6 per cent in the fourth quarter of 2017 and first half of 2018, before stabilising around its steady state of around 5 per cent in the second half of 2018.

"... as growth accelerates due to lagged effects of easier financial conditions and as it becomes clear that inflation will continue to stay above its medium-term target of 4 per cent owing to still-elevated inflation expectations, we expect the RBI to move towards a tightening policy bias towards end-2017 and hike repo rates by a cumulative 50 bps in 2018, starting next April," the report added.

Earlier this month, the RBI left key policy rate unchanged at 6.25 per cent for the third review in a row, citing upside risks to inflation. It had, however, increased the reverse repo rate -- which it pays to banks for parking funds with it -- by 0.25 per cent to 6 per cent, narrowing the policy rate corridor.