RBI may hold rates due to inflation

The Reserve Bank of India (RBI) is widely expected to hold the interest rates at the current levels. The bi-monthly Monetary Policy Committee (MPC) meet is on and the outcome of the review will be announced on Wednesday, December 6, 2017.

Many economists believe that rates have bottomed and money markets will move from a liquidity-surplus situation to a liquidity-neutral one post last year's demonetisation drive. The RBI is expected to keep rates on hold because of the inflation, which is expected to rise due to higher food prices and higher crude oil prices.

India’s annual rate of inflation based on wholesale prices, Wholesale Price Index (WPI) surged up to 3.59 per cent in October. Even the retail inflation, Consumer Price Index (CPI) surged up to 3.58 per cent in October as against 3.28 per cent in September, according to data released in November. In addition, concerns over inflation due to the impact of higher oil prices, bank recapitalisation and fiscal slippage risks will also leave the central bank wary of lowering rates.

Higher oil prices are virtually the same as to a negative terms-of-trade shock that weakens growth, increases the inflation and deteriorates the twin deficits (fiscal deficit and current account deficit). The MPC may recommend a status quo because of the rising crude oil prices in the international market. It is observed that every US$10 per barrel rise in the price will worsen India’s fiscal balance by 0.01 per cent and current account balance by 0.4 per cent of Gross Domestic Product (GDP).