Urjit Patel led RBI now under spotlight over this

After the Centre vs RBI row has blown over, Governor Urjit Patel is under the spotlight again, this time about which way will the central bank lean as far as key interest rates are concerned. Will he hike, cut or hold? Here is what this latest study says.

The Reserve Bank will hold the rates for the remainder of the fiscal year ending March 2019 and is likely to go for "measured hikes" in FY20 as inflation inches up, Singaporean lender DBS has said.

Decision on rates will be majorly influenced by the movement in oil prices and also the currency, which were termed as "wildcards" by its house economists.

In a report that comes days after the headline inflation print eased to a surprising 3.31 per cent for October, the lender lowered its consumer price inflation (CPI) expectations for FY19 to 4 per cent from 4.4 per cent earlier. It said the price rise scenario will go up to 4.2 per cent for FY20, which may prompt the RBI to go in for a hike.

"The RBI is likely to get the leeway to hold the rates unchanged this year owing to the below target inflation. We pencil in measured hikes in FY20 to contain core pressures, with oil and currency direction seen as wildcards," it said in the note.

The lender said inflation is averaging at 4.2 per cent for the first seven months of the fiscal year and points out to lower procurement of food crops by the government through the minimum support price (MSP) mechanism. The increase in inflation expectations next fiscal will be largely driven by food, it said.

"While (slower procurement) is positive for inflation, a prolonged phase of weak food/farm prices trigger concern over the negative repercussions for agricultural incomes and rural demand," the lender warned.

It can be noted that under its medium term inflation targeting framework, the RBI is committed to anchor the price rise at 4 per cent with a leeway on either side.

So far, the RBI has hiked rates twice by a cumulative 0.50 per cent this fiscal, responding to inflationary concerns from factors like rupee depreciation which lost over 13 per cent year to date and higher oil prices which had jumped to USD 86 a barrel earlier this month but considerably down now.

However, in the past month, both the crude prices and the rupee have shown movements which are positive for the domestic economy.

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The RBI's inflation modelling has also come for criticism following the release of data for October, which saw the headline number declining to a surprising low. Even as the rupee strengthens, the Singaporean lender said, India needs to be watchful of hardening of rates in the US, which may lead to capital outflows.