India's rate cutting cycle has come to an end and policy rates are likely to be on hold throughout 2017 as inflation is expected to stay above the Reserve Bank of India's (RBI) target, says a Nomura report. The minutes from the monetary policy committee's February 8 policy meeting shows that focus has shifted to lowering inflation towards the medium term target of 4 percent.
The Japanese brokerage firm said growth is expected to bounce back as the economy is remonetised and inflation, which is a key factor for RBI's policy decision, is also expected to inch higher owing to firming up of rural wages.
"We believe India's rate cutting cycle has come to an end because growth should gradually bounce back as the economy is remonetised...... we expect inflation to also inch higher towards 5.5-6.0 percent in second half of 2017-18 (above the RBI's projection of 4.5-5.0 percent) owing to the firming up of rural wages, higher minimum support prices and a gradual narrowing of the output gap," Nomura India Chief Economist Sonal Varma said in a note.
Nomura expects policy rates to stay on hold throughout 2017, the note added.
The Reserve Bank in its policy review meet on February 8 kept key interest rate unchanged at 6.25 percent and said that it is awaiting more clarity on inflation trend and impact of demonetisation on growth.
The next meeting of the monetary policy committee is scheduled on April 5 and 6, 2017.
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