Besides rate move, policy guidance in focus in India

The Reserve Bank of India is widely expected to lower benchmark Repo rate by 25bps today. This will take the policy rate to 7% and the fixed corridor to take the reverse repo to 6%. Equal importance is likely to be given to the policy guidance. Back in June, the RBI had lowered rates but maintained a hawkish stance. In August, the assessment of inflation had softened, with risks to the Jan16 target of 6% seen as 'balanced' com¬pared to 'upside' earlier. Jan-Mar15 CPI estimate was lowered, adding that developments will be assessed closely to gauge any "emerging room for more accommodation". 

The central bank is expected to maintain a balanced outlook today, acknowledging weak Jul/Aug CPI numbers but maintain caution on the US Fed rate outlook, pay commission impact and farm output trends. In addition, the inflation estimate for the Mar16 quarter is likely to be lowered to 5.6-5.7%, along with a benign view on growth prospects especially after the unproductive monsoon parliamentary session. A cautious stance is however likely on the future inflation trajectory, especially if policymakers bring the next inflation target of 5% by January 2017 into focus. 

Authorities will also be keen to maintain positive rate differentials in the nearterm, even as spreads between INR and USD rates are bound to compress in the coming quarters. Broader uncertainty over the US rate outlook, strength of global growth and slow domestic reform progress has seen foreign investors' trim equity and debt holdings. Foreign portfolio investors (FPIs) have been cumulative net sellers in Aug and Sep to the tune of USD 3.5bn (higher proportion of equity outflows). On year-to-date basis, India has still attracted net inflows, better-positioned than other Asian markets like Indonesia, Thailand, Taiwan and SKorea, based on Bloomberg data.