RBI likely to leave policy rate unchanged at 6.25 pct, says Scotiabank

The Reserve Bank of India (RBI) is expected to leave its policy rate unchanged at 6.25 percent and to soften the stance of the monetary policy on Wednesday afternoon, aimed at striking a balance between bolstering the nation’s economic growth and securing the retail inflation target of 4 percent±2 percent on a durable basis, Scotiabank reported.

In addition, the central bank may need to revive India’s credit supply growth that has decelerated markedly. The nation’s CPI inflation dropped to 2.99 percent y/y in April from 3.89 percent a month ago, compared to market forecasts of 3.30 percent. The base effect suggests an even softer retail inflation going forward. In addition, normal monsoon rainfall forecasted by the Indian Meteorological Department (IMD) would keep the nation’s retail inflation benign.

The IMD said last week that the monsoon is likely to reach Mumbai around 8-10 June after touching the Kerala coast on 30 May. Given continued portfolio inflows, India’s foreign reserves rose to a record high of USD379.31 billion as of May 19 before dipping USD547 million the following week.

Moreover, the central bank has piled up its long positions in FX forwards/futures to USD22.6 billion as at end-April, avoiding pumping liquidity into the banking system filled with surplus cash. It comes as no surprise to the market as the INR’s strength had spurred the government’s concerns. Rising foreign currency stockpile could filter out extreme volatility in local FX market and slow the pace of appreciation in the INR.

"We stay watching the headlines on US political controversy and ECB monetary policy meeting that could dampen market sentiment and undermine most EM Asian currencies including the INR. In the near-term, USD/INR is expected to remain stuck in its current trading range of 64-65," the report commented.