RBI likely to lower policy rate by 25bp

In order to strengthen India’s economic growth, the Reserve Bank of India (RBI) is likely to lower its policy rate by 25 bp today, according to Scotiabank. On 29 February, the Indian government had introduced a budget sticking to the path of fiscal consolidation. From 1 April, the MCLR guidelines came into effect and are targeted at enhancing the transmission of policy rates into the lending rates of bank. Finance Minister Arun Jailtley called for lowering of interest rate as the government is sticking to fiscal deficit commitments and as India’s CPI inflation has been in check. Moreover, the RBI is also expected to lower its CRR, added Scotiabank.

A pro-growth monetary policy, along with a cautious fiscal policy, will continue to attract additional foreign funds, underpinning the Indian rupee, noted Scotiabank. The purchase of foreign currencies by the central bank amidst portfolio inflows might ease volatile FX markets and further stock up India’s foreign reserves. In the four weeks ended 25 March, the country’s foreign reserves grew 8.77 billion.

Moreover, the Reserve Bank of India has increase the limit of foreign investment in government bonds by INR 105bn and will further increase the limit by additional INR 100 billion from 5 July. India’s Prime Minister Modi, in late March, had stated that the monetary panel of the RBI will not have any member from the government. This will maintain the central bank’s independence and boost foreign investors’ sentiment, said Scotiabank.

“USD/INR is likely to trade lower in the coming weeks but stay above a support level of 64.6. We stay with our short EUR/INR cross position with a target of 70”, added Scotiabank.

The Indian rupee is expected to return to its path of slow depreciation in the medium term if market concerns regarding US Fed’s tightening come again before June FOMC meeting. According to Scotiabank, by late 2016, USD/INR is likely to reach 69.5.

Meanwhile, the RBI is expected to avoid loosening policy very aggressively if CPI inflation does not decelerate sharply as the central bank intends to ensure “one year expected Treasury bill real interest rate of about 1.5-2.0%”. Lowering rates untimely might lower real interest rate and eat away the country’s residents’ deposit income, stimulating investment demand for gold on worries regarding accelerating inflation, This in turn will be a risk to the country’s external balance, noted Scotiabank.

“The central bank is likely to reduce CRR or SLR as well today to loosen INR liquidity conditions, after draining about INR 1.2tn of funds on 2 April from the system”, says Scotiabank.