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Inflation up, growth down: Will RBI cut interest rates in February’s monetary policy?

FE Online

With a sharp spike in December's retail inflation, the Reserve Bank of India (RBI) may not cut repo rates any further in the monetary policy review next month, according to a note by SBI. An acceleration to  7.35 per cent in retail inflation, breaching the upper end of the RBI’s comfort level of 4 per cent plus-minus two percentage points, may force the governing body to hold rates and analyze its 'accommodative' stance at a time when economic growth is at six-years low. The RBI has cut 135 basis points as of now in the first five meetings of the year 2019. December on the other hand, witnessed no further cut, leaving repo rate unchanged at 5.15 per cent.

"RBI did not cut the rate in December when October 2019 inflation rate was 4.62 per cent. Now that CPI inflation has surged to 7.35 per cent in December and January inflation is also expected to remain above 8 per cent, the RBI is likely to hold rate in the next policy," an SBI research note- Ecowrap said. 

The RBI, in its recent notification, said that the continuing high inflation is adversely impacting " the economy's allocative efficiency and impedes growth." Meanwhile, wholesale prices in India also rose to a seven-month high in December 2019. High food prices shot up WPI inflation stood to 2.59 per cent.

According to SBI, inflation is expected to remain high in the last three months of this fiscal year. The inflation for the remaining fiscal is expected to be around 7 per cent, thus averaging to 5 per cent for FY20. "We believe that the RBI will go for a long pause possibly throughout 2020 as inflation is likely to remain above 6 per cent till June-July 2020," the note said. It also said that in a situation where growth is low and inflation is high (a possible situation of stagflation), the next three months will be crucial for the RBI to decide on any action at rate front.

Meanwhile, the advance estimates by the Central Statistics Office reveal that India's GDP is likely to grow at 5 per cent this financial year. GDP growth decelerated to 5 per cent and 4.5 per cent in the first and second quarter of FY20, respectively, the lowest readings since 2013.