Standard Chartered Bank expects the Reserve Bank of India to most likely keep the policy rates unchanged for the rest of 2014.
The status quo looks like the most likely scenario for this year unless the consumer price index (CPI) based inflation falls below 8 per cent, said a StanChart research note released ahead of RBI’s policy review meeting on Tuesday.
For January 28 review, StanChart has maintained its view that the RBI will keep the repo rate on hold. This will be the case especially with headline CPI now trending lower.
The RBI will wait for the lagged disinflationary effects of its earlier (September and October 2013) rate hikes, according to the research note.
Repo rate, the rate at which banks borrow from RBI, is currently pegged at 7.75 per cent.
Rate cuts unlikely
Standard Chartered Bank also sees little scope for policy rate cuts in 2014 if the monetary policy framework recommended by Urjit Patel committee is adopted.
However, if headline CPI dips below 8 per cent and moves towards the next target of 6 per cent, the chance of rate cuts will rise, according to this foreign lender.
The rates market perceives the Urjit Patel committee’s recommendations as hawkish, as the proposed CPI inflation target of 8 per cent for the next 12 months is substantially below the current level of 9.87 per cent.
G-Secs yields
For the remainder of 2014, the pace of implementation of Urjit Patel committee recommendations is likely to influence the trajectories of G-sec yields.
Given StanChart's expectation of stable policy rates and improving inflation dynamics in second half of 2014, this foreign lender expects G-sec yields to peak in H1-2014.