The RBI might hold rates in 2016 in fear of inflation

The Reserve Bank of India might keep the repo rate unchanged in 2016. This is because as CPI inflation may remain above its target 5% by March 2017.

"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 a report.

As oil prices, rural wages, negative output gap and MSP stabilize, the report expects underlying core CPI inflation to remain above RBI's 5% target in March 2017. Headline CPI inflation should rise above 6% 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%.

"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.

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