However, the central bank may continue its accommodative policy stance going ahead.
Rising global uncertainty, higher inflation led by a spike in food inflation and liquidity condition in the Indian economy, is likely to urge the Reserve Bank of India to keep its key policy rates unchanged in the June 7 policy meet, Standard Chartered Research report says.
However, the central bank may maintain its accommodative stance.
In its first monetary policy meet of the current fiscal, the RBI had cut rates by 25bps from 6.75% to 6.5% on April 5, 2016.
According to the report, “global uncertainty has increased ahead of the UK’s June 23 European Union membership (Brexit) referendum and possible US Federal Reserve rate hikes.”
The report says, further cuts in the key policy rates are unlikely unless food prices fall faster than expected or oil prices don’t go up further.
Higher food and grain prices pushed up both, wholesale and retail inflation in April. In fact, “April CPI inflation went up to 5.4% year on year, 35bps higher than expected,” the report said.
Monsoons are likely to be normal this year, according to the Indian Meteorological Department and Skymet, however, its impact on food prices will only be visible in the second half of the current fiscal, in the next harvesting season. Till then, inflation is likely to remain higher — Standard Chartered report says it expects “the next few prints to remain elevated, at 5.9% in May, on high food inflation.
“While monsoon forecasts have been encouraging and inflation will likely slow in H2-FY17”
Keeping this in mind, “Policy makers will watch for initial progress on rains and for more clarity on external sector developments before making policy decisions,” it added.
Indian equity markets are eyeing the liquidity condition of the banks, the report said. Currently, banks’ liquidity takes precedence over policy rate cuts.
“The liquidity deficit has narrowed in line with the RBI’s revised stance since April on an accelerated pace of bond buybacks and government spending. However, after September a fresh rupee liquidity shortage may emerge till November on foreign-currency non-resident (FCNR) deposits redemptions of $26 billion (nearly Rs 1.7 lakh crore), the report says.
On June 7, markets are likely to have a keen ear for how the RBI plans to manage the liquidity situation in the economy, the report said.
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