Raghuram Rajan may leave rates unchanged, markets to look for policy indications for future

By: | Published: August 8, 2016 2:16 PM

RBI Governor Raghuram Rajan is likely to highlight signs of macro-stability during this tenure. This includes inflation of 4.9 per cent in FY15/16, after 6 per cent in FY14/15 helped by stable food prices and low commodity prices. The exchange rate has been largely stable, with volatility re-ceding sharply.

RBI monetary policy review: Raghuram Rajan may leave rates unchanged, markets to look for policy indications for futureRBI Governor Raghuram Rajan is likely to highlight signs of macro-stability during this tenure. This includes inflation of 4.9 per cent in FY15/16, after 6 per cent in FY14/15 helped by stable food prices and low commodity prices. The exchange rate has been largely stable, with volatility re-ceding sharply.

While expecting RBI Governor Raghuram Rajan to keep policy rates unchanges, DBS has said that the recent government’s move for 4 per cent Consumer Price Index (CPI) target might catch markets on the wrong foot.

“While the decision to maintain inflation targets is encouraging, achieving the 4 per cent target on a sustainable basis will be a challenge in the absence of structural reforms. To that extent, these targets reinforce our view that the markets might be caught wrong-footed with their expectations for an overtly-accommodative monetary policy under the next Governor. The need to preserve positive real rates in this environment of falling returns will also play on the Governor’s hands,” DBS has said in a report.

It has said that Rajan is likely to highlight signs of macro-stability during this tenure. This includes inflation of 4.9 per cent in FY15/16, after 6 per cent in FY14/15 helped by stable food prices and low commodity prices. The exchange rate has been largely stable, with volatility re-ceding sharply. Reserves stock rose to a record high just as the external balances (primarily current account) turned a corner. “Markets are likely to look beyond the central bank’s decision to keep rates on hold on Tuesday, instead tapping into Governor Rajan’s commentary,” DBS said.

However, concerns will be raised on the recent rise in inflation, as Q2 CPI rose to 5.7 per cent (vs 5.3 per cent in Q1), against the central bank’s target of 5.1 per cent. “There is a high likelihood than inflation remains sticky in Jul/Aug on firm food prices, before easing towards late in the year on favourable base effects, positive crop sowing data and renewed softness in global commodity prices,” DBS said.

It has said that while there is no clear sign on who the next RBI Governor will be or the policy review committee members (beyond speculation), expectations for a dovish successor have spurred markets in recent weeks, especially the bonds space.

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