RBI to hold rates this year, may tighten in 2018

New Delhi: The Reserve Bank is expected to keep policy rates on hold this year but there are risks tilted towards a hike in 2018, a Goldman Sachs report says.

According to the global financial services major, inflation is likely to remain within the RBI's target range of 2-6 per cent, but India is still some time away from bringing inflation to its 4 per cent target sustainably.

"We expect headline inflation to pick up in the next few months as the effects of demonetisation on food prices fade and oil prices trend higher," Goldman Sachs said in a research note.

The report noted that headline inflation is likely to stabilise around the 5 per cent mark from July-September 2017 onwards, with lower household expectations offsetting upward pressures from the civil service housing rent allowance increase. Key risk for price rise is the 'deficient' monsoon, that could lead to a pick-up in inflation expectations.

"We forecast the RBI to keep policy rates on hold this year but see risks tilted towards a hike in 2018," Goldman Sachs said adding that scenarios that could prompt an earlier hike include a 'deficient' monsoon, rising inflation expectations, a sharper depreciation of the INR, or a faster increase in capacity utilisation.

In order to bring inflation towards the 4 per cent mark, structural changes are needed to enhance agriculture productivity and reduce dependency on weather-related factors (such as warehousing facilities and irrigation).

On the February 8 policy review meet, the RBI kept key interest rates unchanged at 6.25 per cent and said it is awaiting more clarity on the inflation trend and the impact of demonetisation on growth. The next meeting of the Monetary Policy Committe (MPC) is scheduled for April-5-6, 2017.