RBI likely to keep repo rate unchanged in upcoming policy review: HDFC Bank

New Delhi: India Inc expects the Reserve Bank of India (RBI) to maintain its hawkish stance in  its first bi-monthly monetary policy review of the new fiscal.

RBI is set to announce its monetary policy on April 5. HDFC bank in a report has said that RBI is expected to keep the repo rate unchanged at its  upcoming monetary policy review.

“Despite downside surprises in the recent inflation readings, the RBI is likely to stay hawkish on account of two factors. One, there could be caution related to higher Minimum support prices (MSPs) that the government could offer to farmers in line with its budget ‘commitment’ and because of surging oil prices. Second, core inflation has become more broad-based and is markedly high for categories like services. Increase in components of salaries (like housing allowance) due for employees of the state governments could add to these pressures,” Abheek Barua, Chief Economist, HDFC Bank said.

Official data has revealed that retail inflation based on the Consumer Price Index (CPI) in February fell to 4.44 percent, from 5.07 percent in January, but remained outside the RBI medium-term target of 4 percent.

“We would also parse the commentary carefully for the RBI’s assessment of global risks such as an economically costly trade war between the US and its major trading partners, comments from the White House on dismantling or diluting trading arrangements like NAFTA, regulatory push-backs in industries like tech on the back of the recent controversy on data leaks, and finally geopolitical tensions with Russia and China (likely to flex their muscles) and the US taking a harder line on Iran and North Korea. This may or may not directly lead to a change in monetary stance but the central bank’s view on how prepared the domestic economy and markets are to face these risks become important,” he added.

As per the minutes of the previous policy review meeting, the RBI`s Monetary Policy Committee (MPC) was guided by concerns about upside risks to inflation posed by crude oil prices, house rent allowances (HRA) and the budgetary fiscal slippage.

HDFC said, change in the outlook of oil prices and emergence of new risks on the international front (trade-war etc.) could have a direct bearing on our exchange rate assumptions as well.

“We no longer expect the marginal degree of appreciation (Q2 vs. Q1) that we had previously pencilled in. We now expect the USD/INR pair to trade in the range of 64.5 – 65.5 in the short term,”  Barua said.

The HDFC report concluded that there  are global factors that the RBI needs to watch out for, and perhaps act during phases of extreme volatility.

“Rupee movement in 2018 is likely to be marginal in our view but it’s important to keep a tad of  exchange  rate  risks in  an  environment  of tightening monetary policies globally and rising concerns of  a  full blown trade-war.  Therefore, a status-quo for the major part of the year is the most likely scenario for the RBI. The rate hike could happen in the last quarter of FY19,” the report said.

At its February meeting, the five members of the Monetary Policy Committee (MPC) , including the three external ones and the Governor, voted in favour of the decision, while RBI Executive Director Michael Patra voted for an increase in the policy rate by 25 basis points.