RBI likely to keep policy unchanged as inflation looms, says Goldman Sachs Research

The Reserve Bank of India is scheduled to conclude its two-day monetary policy meeting on October 4 at 09:00 GMT. We expect the central bank will maintain status quo on policy rates as inflation seen rising towards the RBI medium-term target of 4 percent amid weak economic growth. Also, the RBI will not shake the boat as global factors including a gradual reduction in the balance sheet of the US Federal Reserve also comes in the way of the central bank.

Moreover, Asia’s third-largest economy seen loosing economic growth momentum following Narendra Modi’s experiment to ban high-value currency note late last year coupled with confusion over the new tax system. Following this, the Reserve Bank of India lowered its gross domestic product growth forecast for the current fiscal year to 7.3 percent in its June monetary policy meeting, from 7.4 percent, citing weak consumer spending and investment demand.

Adding to the woes, the new tax system, introduced from July 1 has caused confusion among the business owners over product pricing due to the multiple tax slabs on different goods and services, pushing factory and services sector activity towards contraction.

Gross domestic product grew 5.7 percent in the June quarter, its slowest pace since the January-March quarter 2014. At the same time, the Asian Development Bank in its latest report also lowered India's growth forecast to 7.0 percent and 7.4 percent for this year and next, weaker than the July forecasts of 7.4 percent and 7.6 percent.

Since the last monetary policy meeting in August, market sentiment on the Indian economy has shifted significantly. Based on our conversations both onshore and offshore, market participants earlier were expecting inflation to be “lower-for-longer”, and the growing impact of GST and demonetization to be relatively temporary.

More recently, with upside surprises to inflation and downside surprises to growth, the narrative has shifted with expectations of a stagflationary environment gathering pace. While inflation has picked up over the past few months, we think the decision for the RBI next week is much closer than the market is currently pricing in on the dovish side. India's retail inflation picked up to a five-month high of 3.36 percent in August, largely driven by higher food costs, Goldman Sachs reported in its latest research report.

Meanwhile, FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest