HEADLINES:
December 15 2019
All eyes on RBI’s inflation forecast: analysts
04 April 2018

Central bank expected to hold rates in April 5 policy review meeting

The six-member monetary policy committee (MPC) of Reserve Bank of India (RBI) is likely to maintain status quo on interest rates for the fourth straight policy review due on April 5, even though February retail inflation figures were the lowest in four months.

Consumer price inflation in February slowed to 4.44% on the back of lower food prices, as compared with 5.1% in January. The central bank last reduced interest rates in August when the repo rate was lowered by 25 basis points to 6%.

“The key focus for investors at this week’s RBI meeting is not the policy rate — because another pause is virtually assured — but the tone of its policy statement, and how the six-member MPC votes,” said Su Sian Lim, senior economist, APAC BNP Paribas.

‘One vote for increase’

Only one MPC member, Michael Debabrata Patra, voted for an increase in the policy rate of 25 bps in the December policy meeting while others voted for a pause.

In a note, Ms. Lim argued it would be imprudent of the MPC to ease up on its warnings on upside inflationary risks. “Although inflation has been cooling, upside risks emanate from higher state employee allowances as well as higher minimum support prices for crops,” she said.

In December, RBI had estimated retail inflation at 5.1%, factoring in the rise in house rent allowance of the seventh pay commission. The RBI has a mandate of keeping retail inflation at 4%, allowing for 2 percentage points on either side.

Economists at DSP Merrill Lynch, however, argued the RBI would continue with its balance tone of February policy.DSP Merrill Lynch estimates 4.6% inflation for the Jan.-March quarter— 60 bps below RBI’s — assuming March inflation at 4.05%.

“Will the RBI MPC agree that inflation is peaking?” the economists asked. They also said RBI may commit to providing timely, durable liquidity to reassure the government securities market.

DSP Merrill Lynch said it continued to expect a 25 bps rate cut in the August policy, assuming normal monsoons.

“Though our view is that of status quo, it would be interesting to see the MPC’s accompanying stance in the light of moderation in CPI domestically and its reaction to the recent global developments” said Lakshmi Iyer, CIO-Debt and Head of Products, Kotak Mutual Fund.

 

 

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