Firmer Apr inflation likely to narrow the odds of a RBI rate cut

The possibility of the Reserve Bank of India cutting rates further has eased out with the nation’s April inflation figures impressive. Other factors, apart from a basket of demand and supply dynamics have also played to keep the central bank away from slashing rates. A couple of domestic as well as overseas catalysts are also in place to narrow the odds out.

However, warmer than usual weather conditions, despite positive forecasts of monsoon this year, have underpinned food inflation in May 2016. Evenly spread of monsoon rains will be beneficial to keep inflation under check and prevent a disappointment over the inflationary expectations.

On the external front, less dovish statements from the FOMC minutes have raised expectations of an early rate hike, subject to evolving data, particularly growth, labor markets and inflation. Pay commission changes are also due, just as global commodity prices are up 50 pct from levels of Jan 2016 lows.

On the debt front, debt interests are hurt by the limited visibility for rate cuts and the more pinning of central bank on policy easing through better transmission. At the margin, the upcoming maturity of USD 26 billion worth foreign currency non-resident deposits (FCNR B) in Sep-Nov 2016 and associated impact on liquidity conditions might also cause some unease, DBS reported.

"As these odds build its fallout on the rupee (through higher USD) and slowing portfolio flows are under watch," DBS commented in a recent research note.

A cautious mood is maintained ahead of another tranche of open market operations this week and upcoming state bond issuances.