Despite the falling inflation, banks expect the repo rate to remain unchanged at 6% as rising oil prices may play spoilsport
Bankers and economists are expecting the Reserve Bank of India (RBI) to keep interest rates unchanged when it unveils the first monetary policy for the financial year on April 5.
The two-day meeting of the monetary policy committee (MPC) will begin on April 4.
Despite the falling inflation, banks expect the repo rate, the rate at which RBI lends overnight money to the banks, to remain unchanged at 6% as rising oil prices may play spoilsport.
A senior treasury head of a public sector bank said, "RBI will be very cautious not to topple the apple cart. They will hold rates while talking of a liquidity support to the banks, with yields coming down by 15 basis points in the last fortnight. Globally, interest rates are moving up, crude prices are also going up, and RBI is unlikely to tinker with the rates."
While the US Federal Open Market Committee (FOMC) is continuing in its path of raising interest rates and shrinking balance-sheet, the European Central Bank, too, seems to be becoming less accommodative as the Euro area's growth remains strong. This scenario of tightening global liquidity will keep RBI cautious.
Bank of America Merrill Lynch said in a report, "We expect the MPC to continue with its balanced tone from February with inflation set to recede to 4.05% in March from 5.2% in December. This supports our call for a 0.25% cut in the repo rate on August 1, if rains are normal. MSP (minimum support price) hikes of 50% above cost should have limited inflation impact as revised MSPs are still below market prices for many crops."
UBS Bank said in a report, "We expect the MPC to maintain the repo rate at 6% and the tone of the policy is expected to remain cautious while maintaining a neutral policy stance." With growth trends improving and inflation surprising on the downside, we believe the balance of risks doesn't require the MPC to change its stance, UBS added in its report.
The lower government borrowing in the first half and RBI allowing banks to spread their treasury losses have all brought down the yields by close to 10 to 15 basis points is likely to facilitate a smooth borrowing.
Edelweiss said in a report, "However, we still expect policy tone to be neutral–to-hawkish. After all, inflation is likely to be higher in FY19 owing to higher MSP for agri produce during the year and impact of rising crude oil prices and hike in import duties on agri commodities.
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While the US Federal Open Market Committee (FOMC) is continuing in its path of raising interest rates and shrinking balance-sheet, the European Central Bank, too, seems to be becoming less accommodative as the Euro area's growth remains strong. This scenario of tightening global liquidity will keep RBI cautious.
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