According to Edelweiss the RBI is expected to keep policy rates unchanged in its monetary policy review on September 30. Inflation is surely declining, but the RBI is anxious about the impact of weak monsoon on agri-prices. Expect status quo to be maintained on policy rates, says the report.
We expect the RBI to keep policy rates unchanged in its monetary policy review on September 30. Inflation is surely declining, but the RBI is anxious about the impact of weak monsoon on agri-prices. Further, recovering demand (and its potential impact on inflation) could also be weighing on RBI's mind. After all it has stressed that it wants to fight the inflation battle once. Therefore, given that the RBI perceives upside risks to its inflation target of 6% by January 2016, any hurried easing seems unlikely. Having said that, we think any rate hike is also unwarranted as economic activity remains fragile and the disinflation process is well in place. Hence, we expect status quo to be maintained on policy rates.
In our view, upside risks to RBI's 6% inflation target are limited. The inflation bout of last several years is caused by 4 exogenous factors - the government's food policy, international food prices, continuous diesel price hikes and INR depreciation (and not supply constraints). All these are now reversing. (refer "Contours of disinflationary recovery", September 17, 2014). Hence, we anticipate the disinflation regime to continue even as the economy recovers.
In the last monetary policy meeting, the RBI had shifted focus to its January 2016 inflation target of 6%, and maintained an upside risk to the latter. This accompanied with post policy hawkish statements, rules out chances of a rate cut. However, given that the disinflation process is in place and economic recovery is still fragile, a rate hike is unwarranted too. Hence, we expect the RBI to maintain status quo.
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