RBI May Hold Interest Rates Steady Next Month

The Reserve Bank of India is unlikely to cut interest rates next month (Feb 2020) and maybe on a pause note for an extended period of time in view of rising inflation.

Retail inflation in Dec 2019 surged to 7.35 per cent, way above the comfort zone of the RBI's Monetary Policy Committee target of 4 per cent. The retail inflation based on Consumer Price Index (CPI) was 2.11 per cent in December 2018 and 5.54 per cent in November 2019.

Apart from rising rising inflation an expansionary Union budget due on Feb 1 may also force the RBI to hold rates.

Finance Minister Nirmala Sitharaman is likely to allow the fiscal deficit to expand a bit, in order to push economic growth, which was at a 6-year low. Some analysts see the fiscal deficit rising to 4 per cent. In fact, if income tax sops go through to push growth, it could push consumer spending and hence inflation.

Last month, the Reserve Bank of India held interest rates steady, much to the surprise of analysts and economists.

That is despite the economy expanding at its weakest pace in over six years in the July-September quarter and the Jan. In fact, it is highly possible that the RBI may hold rates until the end of the year.