The CPI inflation in the month of February eased sharply to a four-month low of 4.4% from 5.1% in January, which analysts are saying will lower the pressure on the central bank to shift gears to a hawkish stance at the April review.
The CPI inflation in the month of February eased sharply to a four-month low of 4.4% from 5.1% in January, recording a lower level than the forecast of 5.1% for the fourth quarter by the Reserve Bank of India. This, analysts are saying will lower the pressure on the central bank to shift gears to a hawkish stance at the April review — the first Monetary Policy Committee meeting in the new fiscal year 2018-19.
In three of the six sub-categories, inflation recorded a sequential decline in Y-o-Y in February. While inflation related to housing and miscellaneous items was stable, inflation related to clothing and footwear increased.
Overall, ICRA said, “A sharp dip in retail inflation has reinforced our expectation that the MPC would keep the repo rate unchanged in the upcoming policy review in April 2018, which may prompt a further easing of bond yields in the immediate term.”
The first MPC meeting of the fiscal year 2018-19 is scheduled on April 4 and 5 and the RBI signed off the FY18 with an inflation projection between 5.1% and 5.6% for the first half of the FY18, while maintaining the status quo with a neutral stance. Concerns over crude oil prices and house rent allowance were at large.
But with inflation easing for the second consecutive month, DBS economist Radhika Rao said, “FY19 numbers will largely be rangebound between 4.5%-5%, providing the headroom to keep rates on hold in 2018.”
However, the RBI will be looking at factors like the increase in Minimum Support Price (MSP) for the farmers, oil price direction, market and rupee volatility and several demand indicators.
And if, the RBI, as expected widely, maintains the status quo in April, the ripple effect on the bond market will be positive. “Yields are likely to enjoy a short-term relief, helped also by RBI’s liquidity injection to meet end-quarter/ end-fiscal year squeeze,” Radhika Rao said.
Moreover, RBI’s plan to infuse Rs 1 lakh crore in the banking system by the end of this fiscal should provide room for banks to defer plans to raise their lending or deposit rates in the near-term and keep a lid on short-term yields. In February, with the RBI deciding to repo rates on hold, the yields on benchmark 10-year bonds reacted positively and fell to 7.46% from 7.6% for four consecutive days.