Analysts divided over future course of monetary policy
Will there be a rate cut in the near future on ebbing inflation or will the RBI look at current phase as transitory and hold for long? Analysts were divided lot on future moves of the Reserve Bank.
Bank of America Merill Lynch said the Monetary Policy Committee's (MPC) concerns on inflation are dissolving given the cut in its outlook to 3.5-4.5 per cent band in H2FY17 as against 5 per cent earlier, and expected a rate cut at the next review on August 2 if the rains are good.
Economists at Singaporean lender DBS said the "dovish policy stance renews the possibility of more monetary easing" and forecast a cut of up to 0.50 per cent by March 2018 as against its earlier expectation of no cuts.
Domestic brokerage Edelweiss concurred, saying it also expects a cut of up to 0.50 per cent in remainder of FY18. However, analysts at Japanese brokerage Nomura and British brokerage HSBC felt otherwise.
"The RBI has rightly looked through the current period of low inflation. Our longer-term models are still predicting a return of inflation to pre-demonetisation levels next year and household inflation expectations have barely budged," Nomura said, adding it expects no cuts in 2017.
It said there is an outside chance of a rate cut at the August review, but gave it only a 40 per cent possibility.
"We continue to expect a prolonged pause with risks of a rate cut in August," HSBC said.
The RBI, which is mandated to ensure that inflation is at 4 per cent in the medium-term, chose to go for a status quo in the rates at its review this week, but also lowered its expectations on inflation by up to 1.40 per cent, after the headline number came down to 3 per cent in April.
"April inflation print and revised growth estimates have certainly raised difficult policy questions. We will watch carefully over next few months the incoming data on inflation as well as the indicators of real economic activity. I expect that we will remain adequately state contingent and if data so warrant, act for a broader accommodation through the interest rate policy," deputy governor Viral Acharya had told reporters.
It can be noted that analysts have a separate conference call with the RBI brass later, where the media is no more allowed to listen in.
HSBC said it will be tracking the early rains and reservoir levels, daily food prices, and details in the MPC minutes to gauge the future course of the action.
BofAML said the August 2 cut it expects will signal a lending rate cut to banks before the busy industrial season sets in October.