Telltale signs of weakness in the macro-economic indicators will tie the hands of the MPC to maintain status quo on policy rates, even though inflation seems to be pretty under control.
Growth slowdown deep-rooted
If you are too much worried over the three-year-low GDP growth in first quarter at 5.7 per cent, a look at what RBI said in August 1-2 policy review would be noteworthy. Viral V Acharya of RBI in his statement said that growth slowdown since Q1FY17 was rooted in the stressed balance-sheets of banks and corporates in several sectors.
"Our focus at the present juncture should be on improving the conditions for sound transmission such as healthy bank and corporate balance sheets, market-based benchmarking of bank lending rates and a thriving corporate bond market. Higher real rates are justified in the meantime as absent efficient transmission, attempts to address symptoms of balance-sheet problems with aggressive monetary easing get wasted and can even backfire by misallocating investments, fuelling asset price inflation, creating false hopes of a growth boost, and relaxing the pedal on deeper structural reforms," he said.
Brokerage Nomura India said RBI may revise down its FY18 GVA growth projection, but still expect the RBI to stay on hold as the momentum of core inflation has been much stronger than expected and because the growth slowdown is due to non-monetary factors.
QE exits are major worry
With central banks hiking rates globally and unwinding balance sheets, RBI would like to keep some room for the same. Tushar Arora, Senior Economist at HDFC BankBSE -0.15 % said the exit of major central banks globally from their QE plans could be one reason for the RBI to remain watchful.
"The US Fed is planning to hike rates in December. It has already announced their tapering of its balance sheet size. In Europe, ECB is planning to hike rates maybe early next year. It has also announced that QE will not hold beyond this year. Then we have Bank of England that is considering to come out of its soft money policy cycle. So this high rise in interest rates globally is something which would limit the extent of RBI's easing on the domestic front," Arora told ET Now.
Dollar on the rise
Ever since the Fed has hinted at a December rate hike, the dollar has been on a rise. The dollar index which had been falling since January has been on a rebound and the rupee has seen a few days of sharp correction against the greenback. The outlook remains negative as the US dollar is also riding on hopes that Trump's plan. A rise in dollar could translate to higher imported inflation, analysts said.
Spike in crude oil prices
Crude prices rallied about 20 per cent in the September quarter, its biggest increase for that quarter since 2004. The black gold hit a high of $59.49 last week. India imports a majority of its crude requirement and a weak rupee could mean more import bill.
High frequency indicators steady
They are holding steady. This was reflective in September sales figures as most companies reported stronger-than-expected sales on the back of strong festive demand. The festive season this year has come a month earlier compared to last year and hence most companies witnessed strong inventory build-up in recent months, Nirmal Bang Securities said.
Besides, rail traffic and retail credit are still holding steady which indicates that RBI's commentary about transitory disruption holds true, Edelweiss Securities said.
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