Benign inflation outlook to prompt further RBI easing

The Indian Meteorological Department (IMD) said on 12 April that there is a high chance of an above-normal monsoon rainfall this year. On the back of the above forecasts analysts expect India’s inflation outlook to remain benign this year.

The nation’s March retail and wholesale inflation came in below market expectations, supporting the RBI’s 25 bp rate cut delivered on 5 April and the central bank is likely to trim its policy rate again in the coming months. After raising foreign investment limit in government bonds by INR 105bn on 4 April, the RBI will further enhance the limit by another INR 100bn from 5 July onwards.

The move is likely to draw more portfolio inflows thus supporting the INR. USD/INR is likely to trade lower in the coming weeks as the SENSEX share index has traded relatively higher month-to-date, but is likely to stay above a support level of 64.6.

"In the medium-term, we believe the INR will resume a path of gradual depreciation if market fears over the Fed’s tightening resurface prior to June FOMC meeting. USD/INR is expected to reach 69.5 at the end of 2016." said Scotiabank in a report.