Mumbai: Despite rising shrill calls for a fiscal and monetary boost after Q1 GDP slipped to a three-year low, Reserve Bank is likely to leave policy rates unchanged in the forthcoming policy review next month as it expects a spike in retail inflation going ahead, says a report.
Retail inflation rose to a five-month high of 3.36 percent in August from 2.36 per cent in July. August inflation number was the highest since March 2017, when it was recorded at 3.89 percent.
"Retail inflation is expected to average 3.7 percent in FY18, lower than the medium-term target of 4 percent. With the repo rate at present at 6 percent, there maybe room for further monetary easing.
"However, we do not expect a rate cut in the upcoming policy review, as CPI inflation is expected to chart an upward trajectory over the coming months, and print between 4.5 and 5 percent in March 2018," Icra managing director Naresh Takkar said in a report today.
The MPC meeting is scheduled for October 3 and 4.
While an interest rate cut would be welcomed by corporates, it's unlikely to be sufficient to meaningfully rekindle investment activity, he said.
Extra budgetary resources raised through tax-free bonds by Central PSUs, could boost investment in high- multiplier sectors such as roads, railways, metro networks and affordable housing, without affecting the fiscal deficit.
"Moreover, targeted policy intervention to address procedural concerns like those being highlighted by exporters, may be more effective than a 25 bps rate cut," he said.
The rating agency expects the MPC to revise its baseline forecast for GVA growth for FY18 to under 7.3 percent estimated in the June and August policies.
The recent data on economic activity has been subdued and the transitional challenges posed by the GST have persisted for longer than what was initially anticipated, dampening business sentiment, Takkar said.
The report, however, said the recent slowdown in growth is likely to prove transitory in nature. A favourable base effect is likely to contribute to higher GVA growth in the remaining quarters of FY18, relative to the subdued 5.6 percent in the June quarter, he said.