RBI likely to stand pat in October meeting, may cut rate by 25bp in December

The upcoming Reserve Bank of India’s monetary policy meeting tomorrow would be the first to be chaired by Urjit Patel. Pate is likely to continue with the existing policy as he is an insider. He has been deputy governor in charge of monetary policy under the governorship of Raghuram Rajan. But he is expected to be slightly on the dovish side as compared to Rajan, said Societe Generale in a research note. The central bank is expected to stand pat during tomorrow’s meeting.

Even if India’s headline CPI for the month of September came in at 5 percent year-on-year, below the consensus forecast, it does not mark the beginning of the disinflationary trend, which is key to the RBI opting for its next easing move, stated Societe Generale. Slowing food inflation helped pull down the headline print; however, the rise of core inflation to close to 5 percent year-on-year continues to be a concern. The next inflationary pressure is expected to come from the likely increase in consumption after the implementation of the recommendations of the 7th Pay Commission.

The headline inflation is likely to be above the central bank’s January 2017 target of 5 percent by the start of next year. In spite of this, the RBI is anticipated to lower key interest rate by 25 basis points during its December meeting, as Patel seemed to have expressed more concern regarding the economic growth than about the risk of inflation, according to Societe Generale.

The evident dovish tone raises the possibility of a rate cut in the fourth quarter as Patel appears to be more open to accepting a higher inflation threshold as is currently desired by the government. The tomorrow’s meeting is expected to keep a dovish stance.