India’s inflation outlook to remain benign, RBI likely to lower rate again in coming months

India’s posted a below forecast wholesale and retail inflation figure for March, justifying the central bank’s decision to lower rate by 25bps on 5 April. The country’s inflation outlook is expected to remain benign due a possibility of above-normal monsoon rains in 2016, noted Scotiabank. The Indian Meteorological Department (IMD) recently stated that the rainfall during the monsoon season is expected to be 106% of the long period average.

Meanwhile, India’s gold imports declined last month for the second straight time, dropping 80.48% y/y to USD 972.96mn due to decelerating inflation and falling prices of precious metal. The Reserve Bank of India (RBI) is expected to again lower interest rate in the following months that might attract additional portfolio inflows underpinning the Indian rupee, according to Scotiabank.

Since the start of March, foreign investors have added USD 4.12bn to their holdings in local shares and have bought local government bonds worth USD 961mn since mid-March. The central bank will be increasing the foreign investment limit in government bonds by additional INR 100 billion from 5 July, after increasing by INR 105 billion on 4 April.

The buying of foreign currencies by the central bank in the midst of portfolio inflows will continue smoothening the FX volumes and stock up India’s foreign reserves. In the two weeks ended 8 April, the country’s foreign reserves grew by USD 4.36bn. In the following weeks, the USD/INR pair is expected to trade lower, noted Scotiabank.

“We expect the pair to stay above a support level of 64.6. We stay with our long INR position financed by the low-yielding EUR and SGD”, added Scotiabank.

Meanwhile, in the medium-term, the rupee is expected to return to a path of depreciating gradually if market worries regarding the US Fed is tightening the policy come back before the June FOMC meeting. By late 2016, the USD/INR pair is likely to reach 69.5, said Scotiabank.