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Waiting for a rate cut? Forget it for the whole of 2018

By Anirban Nag

An inflation rate that's breached India's target and growth that continues below potential will probably prompt the central bank to keep interest rates unchanged through the coming year.

The benchmark repurchase rate will stay at 6 per cent until at least the first quarter of 2019, according to most economists in a Bloomberg survey published this month. While swap markets tracked by HSBC Holdings Plc are pricing in a 25 basis point increase over the period, the bank's economists aren't convinced.

"The growth-inflation mix continues to remain worrying and isn't encouraging for the central bank to move rates on either side," said Frederic Neumann, co-head of Asian economics research at HSBC in Hongkong. "Under these uncertainties, the RBI's neutral stance and commitment to remain watchful of incoming data are thought to be highly appropriate."

While no-change on rates could disappoint advisers of Prime Minister Narendra Modi who've been calling for monetary easing to revive growth, dollar-based investors stand to earn more than 5 per cent on rupee investments by the end of next year, among the highest returns in Asia. They'll get an insight into the Reserve Bank of India's thinking when the authority publishes minutes of its latest meeting on Wednesday.

The six-member monetary policy committee led by Governor Urjit Patel this month reiterated its commitment "to keeping headline inflation close to 4 per cent on a durable basis." The rate hit a 15-month high of 4.9 per cent in November while core inflation — which strips out volatile food and fuel — jumped by the most since a Bloomberg index was created in 2015.

Price-gains have been accelerating for five straight months even as private consumption in July-September was the lowest in seven quarters.

However, Bloomberg economist Abhishek Gupta sees non-core prices reversing over the coming months as a good harvest boosts food supplies.

"Slowing inflation will allow the central bank to cut rates — reducing high real borrowing costs that are crimping investment," said Gupta, who predicts the policy rate will be lowered to 5.5 per cent next year. "A wide output gap and prospect for vegetable prices to cool mean inflation will slow" to 3.5 per cent in January-March 2019 from 4.3 per cent a year earlier.

Bloomberg Economics: RBI Holds the Key to Growth Pickup in Year Ahead

Not everyone agrees. India's inflation will accelerate to 4.5 per cent in the year through March 2019 from 3.5 per cent the previous year, according to the median estimate in Bloomberg surveys.

The gap between the 10-year sovereign bond yield and repo rate has widened to levels that may be signaling higher borrowing costs and the credit-risk spread between BBB- and higher-rated AAA paper indicates the bottom of the cycle, according to Nilanjan Karfa and Harshit Toshniwal, Mumbai-based analysts at Jefferies LLC.

"Interest rates can only head higher from here, even though policy rates don't immediately," they said.

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