India’s central bank is expected to keep its benchmark rate at a seven-year low this week amid slowing growth in Asia’s third-largest economy.
With inflation climbing fast toward the Reserve Bank of India’s medium term target, the Federal Reserve starting to shrink its balance sheet and growing speculation the government may loosen purse strings to bolster the economy, the room for lowering rates in the coming months is narrowing.
Nevertheless, the RBI is expected to paint a subdued picture of the economy and could downgrade its forecasts for gross value added — a key input of gross domestic product that strips out taxes and subsidies — for the rest of the year. That could prove to be bad news for India and might hurt inflows from foreign investors, who are already pulling out money from Indian assets. This has seen the rupee hit a six-month low last week.
A survey of economists conducted by Bloomberg News showed the RBI is expected to hold the repurchase rate at 6 percent until end-2017. A separate survey forecast India’s growth at 6.8 percent in 2018, down from 7.3 percent earlier.
For the third-quarter of 2017, India is expected to grow at 6.6 percent, year-on-year, down from a previous forecast of 6.9 percent, as it grapples with uncertainty caused by a newly introduced goods and services tax, a banking system tackling bad loan problems and companies refusing to invest more as they try to lower debt taken during the boom years.
“We are in agreement with financial market and analyst expectations of a rate hold,” said Shilan Shah, India economist at Capital Economics, Singapore. “Further ahead, some are still expecting further, albeit modest, policy loosening. However, with core price pressures building, we expect rates to stay on prolonged hold.”
The RBI faces a juggling act over whether to bolster growth or retain its prime target of keeping inflation checked at 4 percent in the medium term….