RBI likely to keep policy rate on hold in December - Scotiabank

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The reverse repo rate - the rate at which the RBI borrows from scheduled commercial banks - was kept at 5.75 per cent. Though the rate is under the central bank's target of 4 per cent, its inflation forecast for remainder of the current financial year - 4.3-4.7 per cent - is what is bothering the central bank. "Moderation in inflation excluding food and fuel observed in Q1 of 2017-18 has, by and large, reversed".

In its previous monetary policy review, the central bank had stated that it expects inflation to rise from the then-level of around 3.3 per cent "and range between 4.2-4.6 per cent in the second half of this year". The uptick in the GDP (Gross Domestic Product) numbers for the September quarter - after seeing continuous decline for five quarters - eased pressure on the RBI to lower the monetary policy rates.

On Wednesday, the RBI slightly raised its inflation projection to between 4.3 percent and 4.7 percent in the six months ending in March 2018.

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The central bank also said that the "recent rise in worldwide crude oil prices may sustain, especially on account of the OPEC's decision to maintain production cuts through next year".

In this scenario, it stressed, any adverse shock due to geo-political developments could push up prices even further.

Since the last policy in early October, inflation as measured by the Consumer Price Index has accelerated, inching closer to the 4% mark, which is the central bank's medium-term target. "Additionally, given the fact that the economy is seeing a cyclical recovery in growth, RBI would rather wait and watch on how these factors play out before moving rates in either direction", said Upasna Bhardwaj, vice-president and senior economist at Kotak Mahindra Bank.

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"I don't see a reason why RBI would cut rates in the next meeting in February unless something substantial changes".

The RBI's neutral stance is in line with what most surveys had projected.

RBI said that the inflation rate is likely to get higher in near future.

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