RBI June meeting minutes show most member in wait-and-see mode, risks of rate cut rising

The Reserve Bank of India’s June 7 policy meeting minutes indicated that most members were still in a wait-and-see mode in spite of the constant slowdown in inflation. Out of six members, five voted to keep rates on hold at 6.25 percent; however, one voted for lowering the rate by 50 basis points. When the central bank shifted to a neutral stance from accommodative in February, the main reason cited was the requirement to anchor inflation expectations, noted Commerzbank in a research report. This was still the prevailing bias for RBI Governor Patel.

The other members are in a wait-and-see mode; however, the bias is turning more dovish. This is because of the continued deceleration of inflation in the recent months that dropped to just 2.2 percent year-on-year in May. The latest round of minimum support prices for the summer crop was announced. It was a bit higher than anticipated at 5.4 percent for FY2017-2018 as compared with 4.3 percent last year.

This is unlikely to pose a major threat to the outlook of inflation. Meanwhile, it might underpin food prices that might explain the cautious wait-and-see approach from most committee members. Also, a good monsoon this year might limit food inflation. However, the bottom line is that there is a possibility of rate cut in 2017.

“Our base view is still for rates to be on hold but acknowledge that the risks of a cut are rising”, stated Commerzbank.

If inflation is contained, the committee might be open to consider additional rate cuts to help spur investment spending. Meanwhile, a cut is unlikely to hurt INR as it might spur additional inflows. The USD/INR pair is expected to range around 64-65 in the near term, added Commerzbank.

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