RBI to stay on hold until 2016-end, says Nomura

Reserve Bank is likely to hold the pause button until the end of this year, largely because of inflationary pressures, a Nomura report has said.

However, domestic ratings agency India Ratings has said the central bank will deliver another rate cut of 0.25 per cent this fiscal.

Nomura in a research note on Wednesday said that it ‘expects RBI to stand pat until end-2016, as we do not see inflation undershooting 5 per cent on a sustained basis as the cyclical factors driving disinflation (oil price falls, a slowdown in rural wage growth and the large negative output gap) are behind us.’

Though in its forward guidance, RBI had said the stance of monetary policy will remain accommodative, the Japanese brokerage firm expects rates to be on hold until year end.

Reserve Bank on Tuesday cut the key interest rate by 0.25 per cent and introduced a host of measures to smoothen liquidity supply so that banks can lend to the productive sectors and indicated accommodative stance going ahead.

Meanwhile, India Ratings in a note said: "We expect RBI to cut the policy rate by another 0.25 per cent in FY17."

The agency said the move on liquidity will lead to an ease in the situation and the narrowing of rate corridor will lead to a decrease in borrowing costs as banks with surplus funds will be able to earn higher returns on funds parked with RBI and pass it on to borrowers.

The move to reduce the minimum daily maintenance of cash reserve ratio to 90 per cent of the 4 per cent of deposits will infuse up to Rs 20,000 crore (Rs 200 billion) into the system.

Meanwhile, Nomura said rural wages, which drive the cost of production, are more important, and they have been stabilising for a year now.

Moreover one of the key upside risk to headline CPI inflation would be the full implementation of the Seventh Pay Commission recommendations, it added.

"We estimate this could push up average CPI inflation to 5.6 per cent YoY in FY17 versus 4.9 per cent in FY16," it said.

As per the report, inflation is unlikely to undershoot RBI's target of 5 per cent for March and the chances of moving towards 4 per cent by March are very low.

"We, therefore, believe that the RBI will be cautious in lowering rates further, and expect the RBI to stay on hold until end-2016," Nomura said.