The Reserve Bank of India (RBI) is likely to keep the repo rate unchanged in 2016 as consumer price index (CPI)-based inflation may remain above its target of five per cent by March 2017, says a report. With inflation expectations still elevated, we expect RBI to keep policy rates on hold in 2016 and instead focus on greater transmission, Nomura said in the report. As disinflationary forces stabilise oil, rural wages, negative output gap, minimum support price (MSP) the report expects underlying core retail inflation to remain above RBIs five per cent target in March 2017. Headline retail inflation should rise above six per cent due to higher housing allowances, it said. In the fifth bi-monthly monetary policy review last week, RBI kept the repo rate unchanged at 6.75 per cent.
“RBI will use the space for further accommodation, when available, while keeping the economy anchored to the projected disinflation path that should take inflation down to 5 per cent by March 2017,” it had said in the policy statement. According to a report by Bank of America Merrill Lynch, RBI will go for a 25-basis point cut at its February policy meet.