The upcoming monetary policy review of Reserve Bank of India (RBI) scheduled on January 28 is expected to be the biggest trigger for the Indian markets by both domestic as well as foreign analysts.
While earlier all held a view that after inflation easing down in December, RBI would finally start its process of reducing key rates but after the recent suggestions made by the Urjit Patel committee, the hopes have completely faded.
In its report, the committee urged the central bank to keep its focus on tackling inflation rather than shift towards growth. With the suggestion coming in from the committee, most of the foreign financial firms feel RBI Governor Raghuram Rajan would yet again announce status quo in the monetary policy and retain its hawkish stand on the inflation.
While applauding the suggestion of committee, Bank of America Merrill lynch said, “We welcome the Urjit Patel monetary policy committee’s recommendation that the RBI should shift focus to inflation and fix the consumer price index (CPI) inflation target at 4 per cent with a 2 per cent range band.”
The US based foreign institutional investor (FII) further added that the RBI would now try to bring down inflation gradually from 10 per cent to 8 per cent over the next 12 months and to 6 per cent over the next 24 months. The firm feels that since controlling inflation is expected to be the primary target for the RBI, the central bank might retain its hawkish stand like it did in the previous policy. “We continue to expect the RBI to pause on January 28 as CPI is expected to further come off in January on falling inflation.”
Standard Chartered bank expects the central bank would keep the policy rates in the upcoming policy and for the year 2014 as well. In its report the bank said, “The status quo looks like the most likely scenario for this year unless the CPI based inflation falls below 8 per cent.”
As far as the January 28 review is concerned, the bank maintained its view that the RBI will keep the repo rate on hold as it would wait for more data on CPI before deciding to reduce rates. The report by the FII further added, “If headline CPI dips below 8 per cent and moves towards the next target of 6 per cent, the chance of rate cuts will rise.”
Just like others, Deutsche Bank also feels that this time again RBI would continue with its hawkish stand towards inflation and maintain status quo in the January 28 policy review. While pointing out its expectations from the policy, Deutsche Bank in its research note said, “RBI would continue with the current policy framework of reverse repo, repo and MSF rate with 100bps spread between the repo and the other two rates.” But while commenting on the recommendations made by the committee, bank called the proposed framework as “soft inflation targeting.”
While most of the foreign firms expect RBI to make no changes in the upcoming policy review, Goldman Sachs said that the central bank might just announce a small hike in repo rates. The firm said, “In the near-term we think that given the current headline inflation at 9.9 per cent is significantly higher than the 12-month target of 8 per cent, and given lags in the transmission of monetary policy, there is a case for a front-loaded repo hike of 25 bps in the January 28 policy meeting.”
Even though Goldman Sachs expects a hike in repo rates on short term, it welcomed the suggestions made by the Urjit Patel committee and said, “We think the report is forward-looking and market friendly in its proposals of developing a term money market, reducing large fluctuations in liquidity, and in removing administered interest rates, and other kinds of interest rate subsidies among others.”