Balancing the jump in retail inflation in April coupled with exogenous headwinds, DBS Bank expects the Reserve Bank of India to keep its policy rate steady at 6.5 per cent.
The outcome of the second bi-monthly monetary policy review will be announced by the Reserve Bank of India on Tuesday.
Radhika Rao, Economist with Singapore-based DBS Bank, said April’s 25 basis points cut (in the repo rate from 6.75 per cent to 6.50 per cent) and a host of liquidity supportive measures had shifted the RBI’s focus to efficient transmission of the 150 basis points rate cuts announced since early 2015.
"While one eye is on liquidity needs, inflation developments since April have also lowered the odds of imminent cuts. The policy guidance is likely to stay neutral as the RBI weighs the run-up in April food inflation, against positive monsoon expectations," said Rao in a report.
The Economist observed that food prices likely remained firm in May as well due to warmer than usual weather and seasonal influences (data due mid-Jun). Authorities will nonetheless draw comfort from the Indian Meteorological Department’s (IMD) estimates of above normal rainfall in June-September, with its temporal and spatial distribution of utmost importance.
"In addition, prevailing crude prices (in US dollar terms) are slightly above RBI’s oil assumption for this year. Moreover, while global prices have slipped sharply since mid-2014, domestic fuel prices have not corrected as much due to multiple fuel excise duty hikes since November 2014," Rao explained.
She added that with the latest uptick in global oil prices, domestic prices have also jumped notably. The latter’s pass-through is already evident in the transport and communication component of the CPI (consumer price index), which quickened from 0.02 per cent YoY (year-on-year) in April-December 2015 to 1.7 per cent YoY in the quarter ending March 2016.
"Externally, policymakers will prefer to bide their time to monitor US Fed rate normalisation risks (June/ July) and Brexit worries (referendum on June 23). Any resultant spike in volatility could hurt global markets and necessitate coordinated policy action. This is likely to see the RBI remain by the sidelines ahead of these event risks.
"In terms of policy outlook, we retain our call for another 25 basis points cut in the third quarter before a prolonged pause in the year ahead," Rao said.