Mumbai: The Reserve Bank of India is expected to keep rates unchanged in its bi-monthly credit policy on Thursday , according to an ET poll of 20 market participants, who mostly feel that the central bank and the government are in sync with each other on the matter.
While all 20 expect a hold on rates, most feel markets will be looking for commentary on inflation as a key to whether rates will moderate on corporate debt and mortgages, especially after the central bank changed its policy stance to `neutral' from `accommodative' when the Monetary Policy Committee met last in February .
The committee is likely to as sess this in the light of inflation amid the rupee's rising value, respondents said.
“We expect the RBI to reiterate its neutral stance, but leave the door open for further easing with core inflation coming off,“ said Indranil Sengupta, India chief economist at Bank of America Merrill Lynch. “While some of the rupee appreciation is seasonal, it does help to offset imported oil price inflation.“
India's retail inflation rate, measured by the consumer price index (combined), rose 3.65% in February compared with 3.17% in January and 5.26% a year ago.
A strengthening rupee could well turn out to be a cushion for a central bank determined to check price increases. The local unit gained about 2.76% in March against the dollar amid a surge in overseas fund inflows.
But an early alert on lowerthan-expected rain during the monsoon may play spoilsport with the lower-base effect (yearon-year comparison) fading in the coming quarters.
The banking system is awash with cash as the government's note-swap programme triggered a surge in bank deposits in the past five months after demonetisation was announced on November 8 last year.
“This policy should be clearly aimed at ensuring lower interest rates through market mechanism while ruling out a policy rate reduction,“ said Soumya Ghosh, chief economic advisor, State Bank of IndiaBSE 0.58 %. “This could be achieved by RBI by creating a favourable demand-supply balance of government bonds amidst persistent liquidity surplus in the system. One way to achieve such is to increase demand for government bonds.“
Banks park their surplus funds with RBI at 5.75% with RBI's reverse repo window, but the lending is collateralised as lenders receive sovereign bonds from the central bank. If uncollateralised, supply will drop adding to demand. In the post-demonetisation period, aggregate deposits rose `4.27 lakh crore, according to an analysis by SBI Economic Research. The average core liquidity (adjusted for government surplus cash balances) increased to `4.6 lakh crore in March.
“RBI's neutral stance is not compatible with the abundant liquidity ,“ said Abheek Barua, chief economist, HDFC Bank.“Markets are seeking some draining measures from the central bank in this policy.Instead of cash reserve ratio or market stabilisation scheme, standing deposit facility can be a prudent measure... RBI may offer more explanations justifying its neutral stance as markets would see extended pause in rate action.“
Since RBI's stance change in February, sovereign bond yields have risen about 50 basis points, pulling prices down.Overseas fund flows have resulted in yields hardening by about 20 basis points to 6.68%.A basis point is 0.01 percentage point.
Foreign portfolio investors invested a net Rs 56,261 crore in domestic equities and debt securities in March, a record for a single month, according to data from NSDL, a depository .
“(President Donald) Trump's policies and (US) reflation worries will continue to weigh on emerging markets including India,“ said MS Gopikrishnan, head of foreign exchange, rates and credit trading at Standard Chartered Bank. “ A rating upgrade on the back of renewed political stability could also provide the needed stability to the currency .“
The flip side is the June quarter could push the rupee a little lower as overseas flows are expected to contract with the widening fiscal deficit.
“RBI is likely to check any sharp rise in the rupee's value as it will also help country's Make in India campaign through expor ts,“ said Indranil Pan, chief economist, IDFC Bank. This thought process should weigh on RBI's policy making. “The rupee will lose value over a period of time due to inflation differential between India and its trading partners.
Source: economictimes.indiatimes.com