RBI to be on hold unless inflation, growth undershoot targets

New Delhi: The Reserve Bank is expected to hold rates steady over the "foreseeable future", unless inflation and growth undershoot targets sharply, says an HSBC report.

"If the RBI did not find space to cut when it was 'accommodative', the room to cut when it is 'neutral' will be even smaller," HSBC Chief India Economist Pranjul Bhandari said in a research note.

HSBC had earlier expected a 25 bps cut to be the last one in the cycle.

"Following the change in stance, we remove this final rate cut from our forecasts. We believe that the RBI will hold steady over the foreseeable future," Bhandari said.

According to Bhandari the factors responsible for the change in stance of RBI from accommodative to neutral include -- the belief that growth will 'recover sharply', inflation will rise to the 4.5-5 percent range in the second half of 2017-18 among others.

The global financial services major noted that a "disciplined" fiscal stance of the government and RBI's changed focus bode well for macro stability of the economy.

HSBC expects 2017-18 growth at 7.1 percent -- lower than the central bank's projection of 7.4 percent.

RBI lowered its 2016-17 GVA growth projection to 6.9 percent from 7.1 percent earlier.

"We are concerned about investment, which was already contracting 5.6 percent year-on-year before demonetisation and may become worse (on the back of heightened policy uncertainty), before improving,"

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 MPC is scheduled on April 5 and 6, 2017.