Most market participants see central bank maintaining status quo in policy review
Reserve Bank of India (RBI) governor Urjit Patel will watch the rains before changing his stand on the monetary policy.
For now, bankers say the central bank will keep rates status quo, and the stand will continue to be neutral, but the inflation forecast may have a dovish undertone.
Venkat Nageswar, deputy managing director - global market, State Bank of India (SBI), said, "Monitoring the distribution of monsoon will be one of the important inputs that RBI will wait before it changes its stance from neutral to accommodative. Most of its fears on food inflation, imported inflation and crude prices have abated. The Indian Meteorological Department (IMD) has also predicted a normal monsoon. So the only factor left is to watch is the quantum of rainfall."
With the GDP growth at just 6%, some quarters have already started asking for a rate cut, but RBI would not like to stake its credibility by playing to the gallery. Even the new GST regime in unlikely to impact inflation except for a 3 to 4 basis points, which would mean inflation is insulated from the new tax regime.
Jayesh Mehta, MD & country treasurer at Bank of America, told DNA Money, "There will be no change in the policy stance but they may change their forecast for inflation to a dovish stand. For now, they will also consider the distribution of rainfall among other things before changing their stance."
However, there is a group seeking a rate cut to push up growth with lower rates of interest, but bankers say that RBI is unlikely to play to the gallery. While the full-year GDP growth for 2016-17 came at a respectable 7.1%, the numbers have benefited from a change in how inflation is measured, but the dampener was that the fourth-quarter GDP growth fell to 6.1%.
Rating agency Icra said in a report that IMD's monsoon projection, the expectation of a moderate hike in minimum support prices, stable global commodity prices and a modest weakening of the rupee may put the CPI inflation in 2017-18 to average 4-4.3%, lower than its earlier assessment of 4.5%, while exceeding the 4% level being targeted by the Monetary Policy Committee (MPC). Nevertheless, the CPI inflation is likely to slope up over the course of the fiscal, partly on account of an unfavourable base effect in the later months, similar to the direction that the MPC had indicated in the last policy review.
Naresh Takkar, managing director and Group CEO, Icra, said, "The CPI has remained below 4%, i.e. the medium-term target, for six consecutive months. Moreover, several inflation risks highlighted by the MPC in April 2017 have subsequently abated, with the improved outlook for the monsoon, rate structure of the goods and services tax (GST) and easing of commodity prices. At the same time, there is a visible improvement in volume growth in a number of sectors post-remonetisation, although a broad-based revival in private sector investment remains elusive."
...& ANALYSIS
- Some quarters have started asking for a rate cut, but RBI may not play to the gallery
- The new GST regime is unlikely to impact inflation except for 3 to 4 basis points rise
- CPI inflation is likely to slope up over the course of the fiscal, partly due to unfavourable base effect
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 "Urjit Patel")
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