The Reserve Bank of India has left interest rates unchanged at a five-year low of 6.5 percent, and promised to maintain an accommodative stance. But the RBI governor Raghuram Rajan also flagged off multiple upside risks to inflation. Now while most economists and market participants still expect another 25 basis point rate cut in 2016, most are not betting on a move in August.
Nomura, the Japanese financial holding company, believes that the RBI policy was on the “hawkish side.” Nomura’s strategists told Bloomberg News that the central bank may remain on hold in the foreseeable future.
The RBI had warned that the inflation surprise in April made the future trajectory “somewhat uncertain.” India Ratings believes that the uncertainty over inflation will play a crucial role in when the RBI decides to cut rates next.
The RBI has retained the inflation target for the current fiscal at 5 percent, but with an upward bias.
Madan Sabnavis of CARE Ratings believes there would be no rate cut if the headline inflation remains above the target. Considering the recent trend in inflation, Sabnavis expects a rate cut only in the October or the December policy.
Kotak Securities warns that RBI’s accommodative stance is nearing an end. They however are still pricing in one 25 basis point rate cut, either in August or in October.
Not everyone is pessimistic about the prospects of a rate cut in the coming months. Citi expects a 25 basis point rate cut, as the downside risks to inflation outweigh the upside risks, given Meteorological Department’s prediction of an above average monsoon.
HSBC too believes that rains hold the key to future rate cuts from the RBI. They are pricing in a 25 basis point rate cut in August, if there’s sufficient rainfall in June and July.
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