India: rate cut, bets drop as recovery gains hold, inflation remains high

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By Swati Bhat

MUMBAI, Nov. 15 (Reuters) – Negative real rates in India and resuming growth alongside high inflation suggest that its central bank has little room for further monetary stimulus, but policy should remain accommodative, said economists and analysts.

Industrial production in September increased for the first time in six months, while green shoots are also visible in rising goods and services tax collections, higher energy consumption and a rise in the index purchasing managers, among other indicators.

With inflation remaining above 7% in October for a second consecutive month, well above the RBI’s medium-term target of 4%, views that India is near the end of the cycle current rate cuts have become more pronounced.

“The inflation rate has been consistently ahead of not only your target rate but also the upper end of your target range. Ideally, you should be considering rate hikes right now,” said Sameer Narang, economist in chief at the Bank of Baroda.

Although the central bank is unable to raise rates due to the impact of the COVID-19 pandemic on economic activity, it would still be aware of the long-term impact of real interest rates negative on the economy, economists say.

High inflation is a risk the RBI cannot afford to ignore, Nomura economists wrote in a note.

JOKER IN THE PACK

The RBI said on Wednesday that the outlook for an economic recovery has improved, a comment interpreted by some analysts that the bank may not need to do much more to stimulate growth.

If the recovery continues over the next few months, the RBI said it expects the economy to emerge from the contraction seen in the first two quarters and return to positive growth in the December quarter. .

Rating agency Moody’s on Thursday revised its growth forecast for 2020/21 to a contraction of 8.9% from its earlier forecast of 9.6%, citing the steady decline in new active COVID-19 cases since September. COVID-19 is widely viewed as the wild card of the pack by most analysts.

They said the central bank would help banks and businesses lower their borrowing costs unless a second wave of infections requires it to provide more direct support through rate cuts.

Daily coronavirus infections in India are less than half of their peak reached in September, but the economy is still recovering from sweeping lockdowns to stem the spread of the pandemic.

Since March, the RBI has cut the pension rate by 115 basis points to cushion the shock of the crisis.

“Given the fragile state of the economy, the RBI is likely to maintain its accommodative stance for an extended period,” said Sujan Hajra, chief economist at Anand Rathi Securities.

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