RBI likely to maintain its 'neutral' monetary policy stance

MUMBAI India's central bank will likely strike a less hawkish tone while leaving interest rates unchanged at a policy meeting on Wednesday, according to analysts, as inflation is running well below forecasts, and the economy has slowed more than expected.

In addition, the central bank may need to revive India's credit supply growth that has decelerated markedly.

IMD has forecasted normal rainfall in monsoon this year. These are indicators which are available.

The GDP growth has declined to 7.1% in 2016-17 as per provisional estimates as against the revised growth of 8% in 2015-16.

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.

HSBC said it still saw the possibility of a rate cut in August, a move the RBI could set up by adjusting its inflation projections. "I think commentary of the policy will be benign", State Bank of India DMD and Chief Financial Officer Anshula Kant said.

The six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel will meet on June 6 and 7 for the Second Bi-monthly Monetary Policy Statement for 2017-18.

Finance Minister Arun Jaitley had said inflation has been under control for long and is likely to remain so on the back of good monsoon and unlikely spike in oil prices.

Will multi-quarter low economic growth nudge the RBI to cut rates in its upcoming monetary policy? They will wait for CPI data before taking a call. "However, the tone of the upcoming policy review is likely to be less hawkish than the April 2017 policy document and the minutes of the MPC meeting, which could lead to some softening of bond yields", Takkar said. The inflation data for July, to be released in August, will give an indication of the impact of Goods and Services Tax (GST) on prices.

However, as consumer price index-based inflation dropped below 3% in April (aided by food prices not rising as expected and with worldwide crude oil prices staying benign), economists said inflation will trend far below the central bank's projected trajectory. At the same time, inflation based on the wholesale price index slipped to a four-month low of 3.85 per cent in April as both food articles and manufactured items showed cooling in prices.

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.

We expect the MPC to keep the policy rate unchanged in the June 6-7 meeting.

The RBI is also likely to say it continues to monitor global markets as the U.S. Federal Reserve's tightening gives pause to central banks around the world, while dealing at home with a surge in cash at banks after the country's ban on some banknotes past year led to a surge in deposits.

  • Zachary Reyes