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The Reserve Bank of India (RBI) is expected to lower its policy rate by another 25 basis points at its monetary policy meeting on Thursday afternoon to prop up India’s economic growth, after unexpectedly delivering a 25 bp rate cut in its last meeting on February 7. Meanwhile, the central bank will maintain its neutral monetary policy stance, according to the latest research report from Scotiabank.
The latest CMIE data showed that Indian public and private companies announced new projects worth of INR1.99 trillion in the January-March quarter, down 16.0 percent from the October-December period or 54.5 percent from the year-ago period.
In addition, lack of funds has emerged as the most important reason for stalling in recent quarters as it is increasingly difficult for under-financed banks and stressed corporations to finance their projects.
Last Thursday, five state-owned banks received shareholders' approval for capital infusion of INR214.28 billion through preferential allotment of equity shares to the government.
The central bank on Monday announced that it would conduct another round of USD/INR buy/sell FX swap of USD 5bn for a tenure of three years on April 23, the second such auction within a month. Last Tuesday, the central bank received an overwhelming response to its first 3-year USD/INR buy/sell FX swap window.
The RBI’s buy/sell FX swap facility will further lower implied INR interest rate, attracting foreign inflows in the wake of reduced hedging costs. In addition, the total sum of negative-yielding debt represented in the Bloomberg Barclays Global Aggregate Bond Index has surged to more than USD10 trillion as of writing, which could prompt foreign investors to pour more funds into Indian bond markets, the report added.
"We reckon continued rises in India’s foreign reserves will slow the pace of the INR appreciation when USD/INR is trading at around a major support level," Scotiabank further commented.
