Credit ratings agency, ICRA in its latest report has said that the Reserve Bank of India (RBI) is likely to leave policy rates unchanged in its upcoming policy review meeting in the month of October, as consumer price index (CPI) inflation is expected to chart an upward trajectory over the coming months, and print between 4.5 and 5 percent in March 2018. The report came following country’s first quarter gross domestic product (GDP) growth dropping to a three-year low of 5.7 percent.
During the month of August, retail inflation had reached to a five-month high of 3.36 percent and it was 2.36 percent in July. In August, inflation figures were at the highest level since March 2017, when the figure was 3.89 percent. The rating agency estimated retail inflation at 3.7 per cent in FY18, which is lower than the medium-term target of 4 percent and added that at present, the repo rate is at 6%, there maybe room for further monetary easing.
The report further said that while an interest rate cut would be welcomed by corporates, it’s unlikely to be sufficient to meaningfully rekindle investment activity. Extra budgetary resources raised through tax-free bonds by Central PSUs, could boost investment in high-multiplier sectors such as roads, railways, metro networks and affordable housing, without affecting the fiscal deficit. Moreover, it added that targeted policy intervention to address procedural concerns like those being highlighted by exporters, may be more effective than a 25 bps rate cut.
ICRA expects the Monetary Policy Committee (MPC) to revise its baseline forecast for gross value-added (GVA) growth for FY18 to under 7.3 percent estimated in the June and August policies. It also said that the recent data on economic activity has been subdued and the transitional challenges posed by the goods and services tax (GST) have persisted for longer than what was initially anticipated, dampening business sentiment. However, it said that the recent slowdown in growth is likely to prove transitory in nature.
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