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The Reserve Bank of India (RBI) is expected to leave its policy rate unchanged at 6.25 percent with a dovish stance 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. In addition, a decision to stay on hold would be able to enhance foreign investors’ confidence in the MPC and the central bank’s independence.
The RBI will likely deliver a 25 basis points rate cut in October when the nation’s CPI inflation data incorporating the impact of the GST are available, as the central bank needs revive India’s credit supply growth. India’s CPI inflation cooled to a record low of 1.54 percent y/y in June from 2.18 percent the previous month, largely due to the favorable base effect and a drop in food and oil prices. Moreover, the nation’s cumulative rainfall between June 1 and July 31 was 1.6 percent above the long-run average, Scotiabank reported.
Foreign investors have added to their holdings in local bonds recently on hopes for an easing monetary policy, while chasing the highest real yields of government bonds in the region. India’s foreign reserves rose to a record high of USD 391.33bn as of 21 July amid continued portfolio inflows.
Moreover, the central bank has piled up its long positions in FX forwards/futures to USD 22.6 billion as at end-June, 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. While mounting foreign currency stockpile has slowed the pace of appreciation in the INR, it also provides a buffer to the INR in case of a withdrawal of global liquidity.
"USD/INR is likely to stay in the range of 64-65 for now. We would like to sell the pair if it breaks below the 64 support and buy the pair if it rallies through the 65 resistance," the report commented.
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