Concurring to market expectations, ratings agency ICRA expects the RBI to hike the repo rate by 25 bps in its second quarter monetary policy review to guard against a generalisation of inflationary pressures.

“Additionally, we expect the RBI to reduce the MSF rate by 25 bps to further unwind the exceptional measures introduced since July 2013. These measures would bring the Repo-MSF corridor back to 100 bps,” ICRA said in a statement.

Inflationary pressure is due to the anticipation of a gradual moderation of the double-digit food inflation, high suppressed inflation related to under-recoveries of diesel, as well as the anticipated pass through of the net weakening of the rupee since May 2013 into core inflation, it said.

Further, it said that the seasonal credit pickup in Q3FY14 is likely to keep liquidity under pressure. As a result, the RBI is expected to continue with Term Repos and other market operations to manage liquidity in the immediate term.

Concerns regarding the size of India’s current account deficit have receded following the healthy growth of merchandise exports in Q2FY14. Moreover, the USD-INR exchange rate has shown stability over the past few weeks, benefiting from a resumption of FII equity inflows; swap windows for FCNR(B) Deposits and overseas borrowings of Banks till November  30, 2013; and the swap window for oil marketing companies (OMCs), ICRA said.

In ICRA’s view, volatility in the forex market may rise once the OMCs return to the market on a daily basis to meet their dollar requirements.

Following a favourable monsoon season, healthy growth of agricultural output and rural incomes in 2013-14 is expected to boost rural consumption demand in the second half of the current fiscal.

However, damage caused to agricultural output by late rains has emerged as a risk factor for kharif output, even though the recharge of groundwater levels has improved the outlook for the rabi harvest.

“Given our expectation that interest rates would remain firm following a 50 bps increase in the repo rate in H2FY14, ICRA has revised its GDP forecast for 2013-14 to 4.7-4.9 per cent from 4.9-5.1 per cent,” said Naresh Takkar, MD and CEO, ICRA Ltd.

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