RBI likely to keep key rates on hold until late 2018

The Reserve Bank of India will likely keep interest rates on hold until at least the second half of next year, according to a Reuters snap poll taken after the central bank's shock decision to shift its policy stance to neutral.

While the consensus view in the survey of 45 economists pointed to the policy repo rate staying unchanged at 6.25 per cent until July-September quarter 2018, a little less than one-fifth still predicted a cut as early as April-June this year.

The central bank surprised markets last week by leaving the repo rate unchanged and signaling a move away from an easing bias, even though the impact of the government's withdrawal of high denomination banknotes, accounting for around 86 per cent of currency in circulation, was still unclear.

Over the past two years, the RBI has lowered its policy rate by 1.75 percentage points in its longest easing cycle since the global financial crisis.

And while many had been forecasting some pause in the rate cutting, few had expected the central bank to signal a policy shift at its February 8 review.

The median from a smaller sample of economists in the latest poll, conducted Febraury 9-10, showed the next RBI move will likely be a cut to 6.0 per cent in the quarter through to September 2018. That compares with a consensus from a week earlier of two cuts by the end of September this year.

"Fearful of upside risk to inflation, the RBI has shifted its monetary policy stance from accommodative to neutral, indicating a virtual end of easing cycle," wrote Kunal Kumar Kundu, India economist at Societe Generale.

"We, however, believe that some of the challenges - posing upside risk to inflation - may not manifest to the extent that RBI fears. We also believe the demonetization will impact the economy more adversely than RBI's expectation."

Data due to be released on February 13 is expected to show retail inflation cooled in January to the lowest level in at least five years thanks to lower food prices and weaker demand following the government's ban on high-value currency notes.

Asked if the sudden shift in the RBI's tone regarding inflation concerns was a clear sign of no further easing this year, a little over half the 50 economists polled agreed. The remaining 21 disagreed.

The RBI is worried about core inflation remaining sticky. It also said it needs more time to gauge the impact of global risks to both inflation and the rupee, with the currency trading near a record low against the dollar.

A pickup in global crude oil prices, up nearly 14 per cent since end-November, was another concern.

Thirty of 46 economists who answered a supplementary question said they agreed with the RBI's policy stance. The remaining 16 said it was imprudent as the economy was likely to be hit harder than realised by the ban on high value banknotes and the official growth estimate of 7.1 percent for the fiscal year through March would be the slowest in three years.

Farmers, households and companies have struggled to meet their daily cash needs in the wake of the government's surprise action and the official estimate of 7.1 per cent economic growth for the fiscal year through March would already mark the slowest in three years. (Reuters)