RBI likely to lower policy rate again on December 5 to revive Asia’s third-largest economy, says Scotiabank

The Reserve Bank of India (RBI) is expected to lower its policy rate again on December 5 to revive Asia’s third-largest economy, despite relatively elevated CPI inflation. The RBI’s monetary easing will boost local equities further, providing support to the high-yielding INR.

In addition, the Indian government stated Tuesday that it does not intend to revise its fiscal deficit target of 3.3 percent of GDP for the current financial year notwithstanding slowdown in economic activities.

Earlier on Monday, CNBC-TV18 reported that India plans to meet its fiscal deficit target of 3.3 percent of GDP, citing the nation’s finance minister Nirmala Sitharaman as saying in the Lok Sabha. The nation’s fiscal prudence would prompt foreign investors to pour more funds in local bond markets.

The current levels of NIFTY share index and 10-year India government bond yield both suggest the INR is now undervalued, which could be partly explained by persistent rises in India’s foreign reserves.

USD/INR is likely to pare some of the recent gains on hopes for renewed portfolio inflows and progress in the US-China trade talks, the report added.

The market largely shrug off US President Donald Trump’s latest warning, although the president on Tuesday threatened higher tariffs on Chinese goods if that country does not make a deal on trade. During the meeting with the Cabinet overnight, Trump added that he is "very happy with China right now."

"Moreover, China’s further monetary easing will improve risk sentiment broadly as well. Although the market has priced in a 5 bp reduction in the 1-year LPR, the PBoC could even lower the 1-year LPR by 10 bp to 4.10 percent on Wednesday in our opinion. We would like to sell USD/INR with a target of 70.5 and a stop of 72.5, with the aim of earning higher carry from the trade," Scotiabank further commented in the report.