November 29, 2017 / 7:35 AM / in 18 days

Indian inflation likely to rise, interest rates won't, economists say

BENGALURU (Reuters) - The Reserve Bank of India is likely to leave interest rates unchanged at its December policy meeting and through the end of next year, despite expectations that inflation will breach its 4 percent target in the next few months, a Reuters poll showed.

The results, from a poll of economists taken over the past week, also found there is a bigger risk the next move is a cut, even though forecasts diverge in three directions starting from the second quarter of next year.

That suggests both that policymakers have little room for maneuver and the outlook for rates beyond the next few months is exceptionally fuzzy, with several respondents saying they were unwilling to look much beyond the turn of the year.

The poll comes at a possible turning point for Asia’s third- largest economy, with a separate Reuters survey showing economists now expect a rebound in economic growth after five consecutive quarters of deceleration [nL3N1NU3R5].

“In the RBI’s perception, inflation is inching up and the risks of that remaining high remain for a longer duration, say a couple of quarters or so, it may be difficult for the RBI to consider a rate cut around that scenario,” said Shubhada Rao, chief economist at Yes Bank in Mumbai.

“In our opinion, a December rate cut is ruled out. Maybe next year (but) a lot depends on how inflation plays out,” said Rao, who was the most accurate forecaster on the Indian economy in Reuters Polls last year.

The latest survey found 52 of 54 economists expected the RBI to hold the repo rate at 6.0 percent on Dec. 6, with just two forecasting a 25-basis-point cut to 5.75 percent.

The RBI’s Monetary Policy Committee at its meeting in October expressed concern about rising inflation, one of the reasons it decided to keep rates steady then. Inflation rose to 3.6 percent at last count, the highest in seven months.

In the poll, 20 of 26 economists who answered an additional question said inflation was likely to rise above the RBI’s 4 percent medium-term target by March, with forecasts split nearly evenly between the current quarter and early 2018.

But not all economists were concerned about inflation, which is still low by historical standards.

Finance ministry officials told Reuters that India’s government is lobbying for a rate cut.

“We expect the RBI to cut policy rates, if not in December then in its next policy review,” one ministry official told Reuters on condition of anonymity [nL3N1NU1W8].

Prime Minister Narendra Modi’s government has hit the economy with sweeping changes over the past year by removing more than 85 percent of the currency in circulation as well as implementing a new national goods and services tax.

But if the RBI were to cut rates, it would be out of step with the latest trend among major central banks, which are now looking to either tighten policy or move away from ultra-easy policy in place since the financial crisis a decade ago.

The U.S. Federal Reserve has been raising rates for the last two years, the Bank of Canada has lifted them twice this year and even the Bank of England put up borrowing costs earlier this month, in part on inflation concerns.

The global economy is also fairly strong, with most economies growing simultaneously. Yet at its last policy review, the RBI cut its growth outlook for the current fiscal year to 6.7 percent from 7.3 percent, suggesting it is not close to considering raising rates.

The latest Reuters poll found economists overwhelmingly expected no changes to that domestic outlook at the December policy meeting, further evidence that the repo rate is likely to remain on hold at 6.0 percent then and for a while longer.

Sajjid Chinoy, chief India economist at JP Morgan, wrote in a recent note to clients that the significant rise in oil prices over recent months, which will pinch consumers through higher inflation, is a good reason for pause.

“The resulting jump in inflation, which we now see rising to above 4.5 percent next quarter, is likely to keep the RBI cautious at its December review.”

Polling by Khushboo Mittal, editing by Larry King

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