The budget is positive for the medium-term inflation outlook which may lead to a 25 bps rate cut at the monetary policy meet next week, but the Reserve Bank of India (RBI) is expected to keep it on hold for the whole of 2017, says a report.
"On the monetary policy front, with the government sticking to fiscal consolidation and headline CPI likely to undershoot the RBI's March 2017 target of 5%, we are pencilling in a final 25 bps repo rate cut to 6% on February 8," Nomura said in a research note adding with global factors turning negative (higher oil prices, narrowing interest rate differentials), "this is a close call".
Thereafter, Nomura expects both growth and inflation to accelerate, keeping the RBI on hold throughout 2017. On 7 December, the central bank kept interest rate unchanged despite calls for lowering it. It also lowered the economic growth projection by half a percentage point to 7.1% in the first policy review post demonetisation. The central bank will hold its next monetary policy meet on 8 February.
The report further noted that the budget is positive for the medium-term inflation outlook but the pending increase in housing allowances, likely to be implemented from April 2017, is a near-term upside risk to inflation. "This is a statistical impact, but higher house rent allowances can add 100-150 bps to headline CPI inflation," it said.