India seen holding rates steady, RBI expected to sound less hawkish

Along expected lines, the Reserve Bank of India (RBI) monetary policy committee (MPC) today kept the key policy rate unchanged at 6.25 percent for the fourth time in a row.

The Indian sovereign bonds slid Monday as investors remain cautious ahead of the Reserve Bank of India's (RBI) monetary policy decision, scheduled to be unveiled on June 7.

In the April Monetary Policy Statement, RBI has told, 'inflation, excluding food and fuel has exhibited persistence and has been significantly above the headline inflation since September 2016.

The reverse repo rate was also left unchanged at 6.00 percent. Addressing a press conference, the apex bank's governor, Urjit Patel, said the Monetary Policy Committee wanted to keep the rate on hold until further clarity that is expected to "emerge with coming data".

Notching its lowest annual rate in at least five years, consumer price inflation INCPIY=ECI slowed to 2.99 percent in April from 3.89 percent in March, just below the RBI's target of 4.0 percent.

According to data furnished by the Ministry of Statistics and Programme Implementation under a new series April retail inflation rate based on the Consumer Price Index (CPI) was lower than 5.47 per cent recorded during April previous year. The repo rate helps control inflation.

Luckily for the Indian economy, the demonetisation of high-value notes in November past year created a huge cash surplus with the banking system, enabling them to cut deposit rates and also lending rates on retail loans. However, in a regime of declining inflation, high and rising real rates of interest are wholly avoidable - especially with margins under pressure and a sharp decline in profit growth.

India's inflation data has been softer than expected, stronger INR against United States dollar, softer global commodity prices, fading of El Nino risks, Q4FY17 GDP data to a two-year low, credit growth and capex related indicators exhibiting sustained sluggishness and India's Balance of Payment dynamics has been comfortable. "Therefore, we expect the MPC to opt for a pause in the June 2017 policy review".

The Reserve Bank also cut the growth projection for current fiscal to 7.3%, from 7.4%.

"Given the inflation trajectory and as the liquidity is enough in the market, it is unlikely that there would be any rate cut this time".

The earlier projection for the retail inflation in first half of the fiscal was 4.5 per cent and 5 per cent in second half.

IMD has forecasted normal rainfall in monsoon this year. Those demanding a rate cut have also been citing the low inflation numbers.

  • Zachary Reyes